Commodity Analysis

Gold all set to rise further

Rajalakshmi Nirmal | Updated on January 18, 2018 Published on July 31, 2016

Brexit shockwaves apart, the US too is not in a sweet spot. Moreover gold is backed by strong fundamentals

It looks like gold may stay in the limelight for more time. There is still room for investors to make some money. Its strong fundamentals and the negative news from global economy should help.

Just about when it seemed like the EU was getting better, Brexit has thrown new challenges. In December last year, when the Federal Reserve effected the first rate hike, the US appeared solid, but now, with barely 1.2 per cent growth in GDP in the second quarter, there are doubts over its prospects too.

Last week, gold prices rallied to $1351, up 2.16 per cent for the week. The metal’s year-to-date returns stand at 27 per cent.

Global economy

The world is not in a sweet spot. On Friday, data showed that the US second quarter GDP grew just at about 1.2 per cent against market’s expectation of 2.6 per cent growth. A bigger jolt was the fact that the first quarter GDP was revised to a mere 0.8 per cent from 1.1 per cent estimated earlier. Though the Federal Reserve, at its Wednesday meeting, indicated possibilities of a rate hike in September, with Friday’s poor GDP reading, the probabilities for it appear low.

The situation is far from encouraging in the EU too. A survey of professional forecasters by the European Central Bank has indicated that Brexit would reduce Euro Zone growth by 0.26 percentage points next year to 1.4 per cent. Britain, where the shockwaves from Brexit are hitting people hard, has recorded disappointing economic data in the last few weeks. The UK’s headline consumer confidence (survey of 2,000 people between July 1 and 15) fell to a negative 12 in July from negative 1 in June, the sharpest month-on-month fall since 1990 (before the UK recession), says a Reuters report. A survey by the Confederation of British Industry, released on Wednesday last week, revealed that British retailers saw a steep decline in sales in July. The retail index plunged to a negative 14 in July from plus 4 in June, the lowest since January 2012. The market is now expecting the Bank of England to cut rates at its meeting next week for the first time in the last seven years.

Elsewhere too, the going is not good. Last week, the Bank of Japan expanded its monetary stimulus to spur growth. With already a handful of countries having moved to negative interest rates, and with more countries looking to loosen monetary policy, the prospects for the global economy don’t appear great. The IMF has cut its global growth forecast for 2016 and 2017 by 0.1 percentage points to 3.1 per cent and 3.4 per cent, respectively, saying it sees, “a substantial increase in economic, political and institutional uncertainty, especially in advanced European economies.”

Gold’s fundamentals

While the rising economic issues across the globe and easing of monetary policies are a positive for gold, the metal’s own fundamentals, too, may help it in the next few years.

Demand for gold is exploding. SPDR Gold Trust, the largest gold-backed ETF, has seen holdings surge by 315.7 tonnes (up 49 per cent) so far this year. The central banks of Russia, Kazakhstan and China, too, have been large buyers of gold in the world market in the last six months, shows WGC data.

But there is not enough gold supply. A recent report from Sprott Asset Management, a large Canada hedge fund that manages HNI money, says that global gold discoveries, which peaked in the mid-1990s, have fallen now. There have barely been any big deposit discoveries in recent years despite exploration budgets growing manifold between 2009 and 2012. Any new discovery now or in the future, it adds, may take about 10-12 years to bring out the first ounce of gold after the initial discovery.

The other concern is also that the quality of the most recent discoveries of gold are second/third rate.

Reports say that while in the 1950s, ore grades averaged 12 gramper tonne, in recent years, miners are able to get only 3 gram per tonne.

What does all this say?

Gold will remain investors’ darling for more time. However, dollar’s movements too need to be closely tracked. A stronger dollar is negative for gold. But, again, there have been times when both of them have moved lock-step on safe haven demand.

Technically, gold has barriers immediately in the zone of $1,390/1,400. If this level is crossed in the next few weeks, the metal will target $1,420. Retracing the move between 2012 high and 2015 low, the 61.8 per cent Fibonacci retracement level is at $1,510. On the downside, strong supports are at around $1,330 levels. In the domestic market futures exchange, the outlook for MCX gold contract is also positive. Last week’s move shows a strong support around ₹30,000 levels. From Friday’s close of ₹31,549, the contract may well move above ₹35,000 levels in the coming weeks if strong price trends are seen in the international market too. Immediately, there is a strong resistance around ₹31,800-32,000 levels.

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