After significant gains on Wednesday post the US election result, gold prices have, over the last few days, fallen below $1,300/ounce again ($1,227/ounce on Friday). This is explained by a strong dollar and the quick comeback in stock market.

The US dollar index closed at 99 on Friday, up from 98.5 on Wednesday (day’s low was 95.8). Similarly, after the initial knee-jerk reaction, the US equity markets too settled down and saw the safe haven demand for gold die down.

Trump’s plans for new infrastructure and sharp tax cuts are expected to stoke inflation, and move the Federal Reserve to hike rates at a faster clip.

Now, is there any steam left in gold? Over the next one year, the prospects for the metal are still bright, given the increasing geo-political tensions and uncertainties for trade and business.

Gold investors should stay calm now. Though many economists have changed sides post Trump’s win, and now see his victory as positive for the US economy, businesses in the US may see uncertainty over the next six months at the least. It will take some time before the new President comes out clearly about his stand on things from trade to taxation and immigration.

Outside of the US too, the political environment is not any good. The December 4 referendum in Italy over reforming the powers of Parliament has serious political consequences, as it can spark off a larger crisis in the European Union, say analysts. If Italians vote ‘No’, demand for safe havens can spike, as it might have serious political consequences,

So, the outlook for gold is positive. But again, the bull case for the metal is not as straightforward. Given that the Federal Reserve is all set to effect its next rate hike in December (scheduled date for the meet 15-16), there are short-term risks for a rally in gold’s price. US bond yields rose sharply in the last week — yield on 10-year US government bond- hit 2.1501 per cent on Friday, up from 1.85 per cent on Tuesday. If the rally in bond yield continues, there is possibility of a panic in emerging markets. This may see all the hot money fly back to the US and drive the greenback higher — which is not good news for gold.

Gold demand from investors, which was expanding rapidly, has shown some drop in the last few weeks. The holdings of SPDR Gold Trust, the largest gold backed exchange traded fund, were 941.68 tonnes on Friday, down from 949.69 tonnes a week back and 965 tonnes on October 14.

However, gold’s attraction as a diversifier and hedge against equities will only rise in the long term. Even if we assume that Trump goes ahead with his poll promises and makes investments in infrastructure that will only widen the US budget deficit and make it tough for the dollar to hold its fort.

Last week, the World Gold Council (WGC) released numbers for the September quarter showing that investment demand for the metal increased 44 per cent over the same time last year to 311.4 tonnes.

India market cues

In an unexpected move, the Indian government demonetised 500 and 1000 rupee notes last week. This has implications for the gold market in the country. First, as this is a move to wipe out black money, that portion of demand that was coming all along from people who held black money will cease now.

Second, as this plugs the gold that comes through the unofficial route, banks and refiners will start to charge a premium for their gold. Gold prices in the domestic market have moved from a discount of about $3/ounce on November 4 to a premium of $3-$6/ounce on November 11. However, the trend in domestic market gold price will track international prices.

Investors in jewellery stocks need to watch out. The December quarter sales for these players would be good. But, over the next one-two quarters, sales growth may drop. However, given that large players have been focusing on market share gains, the impact should be minimal.

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