Pritam Kumar Patnaik
Geopolitical tension, weak US dollar, stock market volatility & concerns over rising government deficit augurs well for Gold, a safe haven for investors in times of uncertainty
Gold prices had corrected pre and post the FOMC meeting, during which the US Federal Reserve announced their intentions to raise the Fed funds target rate for the third time in the year. However, after the recent fall in Gold, investors haven’t witnessed the lows it made in December, largely due to a weakening US Dollar and uncertainties revolving around President Trump’s policies and politics.
Uncertainty due to the US policies were amplified when the President imposed import tariffs on Chinese products. This drew reciprocation from the China government, who went on to impose tariffs on US products. Additionally, escalating tensions between the US and Russia regarding the Syria issue helped to prop up gold prices. This led to gold breaching its current crucial technical range of USD 1,300/ounce to USD 1,350/ounce.
We believe the uncertain geopolitical outlook and increased stock market volatility is likely to continue in the coming months, which in turn is going to provide some underlying support to the gold prices. Additionally, the US dollar continues to weaken against the basket of currencies and investors in the US fear the government’s deficit spending could be unsustainable and balloon out of control towards the latter half of the year.
ETF demand has also supported bullion prices over the last few weeks. According to a Bloomberg report, China’s Bosera Gold ETF has attracted close to USD 553.8 million in additional investment so far this year, putting it on course for the biggest annual inflow since its listing in 2014. Investors seem to be piling into bullion, taking holdings in all such funds tracked by Bloomberg to 73.2 million ounces, the highest in almost five years.
Meanwhile, one has to keep an eye on the Central Bank’s moves in the coming few months, as their actions could have a significant impact on prices. The Fed minutes released on 11 April 2018 suggested that all policymakers were of the opinion that the US economy could firm up further and inflation could rise in coming months, further, minutes of the central bank's last policy meeting on 20 & 21 March 2018, indicated that the Fed could hike rates at least 3 times in the current financial year.
Some correction in Gold prices could be possible when the rates move higher. Domestic prices have followed the overseas prices and technically have broken the Rs 31,000/10 grams mark. However, domestic players believe that demand has remained sluggish even ahead of Akshaya Tritiya, on 21 April 2018, which is an auspicious occasion for buying gold. Investors believe that the 3 percent GST on Gold will be a deterrent for retail investors.
The same was reflected on the gold imports into the country, as gold jewelers have reduced imports amid expectation of sluggish off take. In March 2017 the import of gold stood at 103.7 MT, and GFMS estimates that the same has dropped to mere 52.5 MT in March 2018. In April 2017 saw India importing 93.6 MT of Gold. This number is expected to be much lower this year, in line with the March month’s trend, Government data for the same is expected to be released later this week. Despite the glut in imports, the fact remains that India is a price taker and we believe that global bullion prices could be in the early stages of a bull run. So how much downside in Indian prices will occur, we just need to wait and watch.
Technically, over next one month we expect that the bullish trend will continue to hold. Internationally, USD 1,300 will act as psychologically strong support level. Any move above USD 1,375 will provide medium term upside breakout from Inverted Head and Shoulder pattern and this will set the bullish tone for the coming months. Break of USD 1,375 can take prices towards USD 1,410-1,415 levels over the next few months.
Technically, on the domestic side, from the start of 2018, MCX Gold has been intact in higher-high & higher-low pattern which is generally a precursor to an upside trend. Prices are managing to hold above psychological level of Rs 30,000, which is also a strong support level, thereby further establishing a bullish trend. We can expect this trend to continue towards Rs 32,000-32,100 level over next few months.