Gold rally driven by investors, central banks

The tide has turned in gold’s favour this year on negative interest rates in many countries

Last week, gold prices had a spectacular rally. The yellow metal moved up by 1.8 per cent to $1,366/ounce hitting a high of $1,375/ounce intra-day on Wednesday. However, dollar strength on the back of a good set of data from the US took some sheen off the metal. On Friday, data showed that US non-farm pay rolls increased by 2,87,000 jobs in June — the highest increase since October last year. The US dollar index ended the week at 96.302, making a gain of 0.68 per cent.

Gold, however, is still the best performing asset year-to-date.

Gold prices are up 28.9 per cent in dollar terms and 46.7 per cent in pound sterling, so far this year. One reason for a sharp rally in the price of gold is the renewed demand from investors. SPDR Gold Trust, the largest gold backed exchange traded fund in the world, has seen inflows surge over the last few weeks. It reported its holdings at 981.26 tonnes, up from 953.91 tonnes a week back.

SPDR Gold Trust held about 1,353 tonnes of gold in December 2012. But, it dropped to as low as 630 tonnes by December 2015 as investors moved out of gold into safer avenues like US treasuries. But the tide has turned in favour of gold in 2016 again on negative interest rates in many countries and the likelihood of a delay in the second rate hike from the US Federal Reserve.

All gold ETFs put together hold about 2,000 tonnes of gold as per numbers put out in Bloomberg. This is higher than what China, the world’s largest gold consumer, holds in its central bank (1,808.3 tonnes).

On a buying spree

A recent set of data from the IMF shows that in the last six months, many central banks have been net buyers of gold in the market. This includes Russia, China, Kazakhstan and Mauritius, among others. Russia has bought about 66.9 tonnes of gold this year and China about 46 tonnes. The trend signals an increasing need for diversification from paper currencies. Also, with negative interest in many parts of the world (Europe, Japan, Denmark, Sweden, Switzerland), the preference to stash money has reduced for central bankers, say experts. Data compiled by WGC in March showed that about a third of the advanced country sovereign debt currency traded with a negative yield and an additional 40 per cent with yields below 1 per cent. So, the opportunity cost of holding gold is low now.

Central banks have been trying to diversify into gold since the global economic crisis in 2008, says WGC. The highest net purchase by them was in the last two quarters of 2015, when they together stacked up about 336 tonnes of gold.

Cues to watch

There are a lot of key events in the US this week beginning with comments from some Fed speakers, release of the Federal Reserve’s Beige book on regional economic conditions, Consumer Price Index and retail sales data. Gold may turn volatile post these releases and it may be prudent to have strict stop losses in place. The Fed fund futures shows no possibility of rate hike from the Federal Reserve anytime soon, but, all economic data releases will be closely tracked by traders to factor in any change.

Gold looks all set to hit the $1,400 mark soon. But, given the sharp rally in the past week, there may also be a pullback to $1,350 levels this week. If, however, the metal manages to inch above $1,380, it can swiftly move towards $1,400 and then to $1,440. Immediate supports are at $1,350 and $1,320.

The MCX Gold contract closed at ₹31,719 last week, up 0.8 per cent. This week, if gold prices in the international market are strong, the contract can inch up further to ₹32,500. On the downside, supports are at ₹31,000 and ₹30,000.

MCX Silver ended last week’s trade at ₹47,487. It may extend gains and touch ₹48,000 this week, if the broader trend remains intact. However, if it starts to move down, it may target ₹45,000 levels. Supports are at ₹47,000 and ₹46,500.

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