What’s making gold sparkle this time?

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Gold prices have been rallying hard since mid-May

In less than two months, they have risen around 10% from Rs 32,590 per 10gms of 24k on 21st May 2019 to Rs 35,830 on 11th July 2019.

In the international markets too, spot gold has been trading at around USD 1,272 an ounce to USD 1,420 per ounce over the same period, once again plotting a rise of over 10%.

So, what’s driving the rally and is there any steam left in it?

Markets expect the Fed to cut interest rates soon

Dial back to a year ago and leading reserve banks across the world seemed to be pursuing a tight stance in their monetary policy –  be it the US, Europe or Japan. And, with a steady improvement in the health of economies, markets were convinced that this was the way forward.

However, the mood has changed with global developments as well as the recent US economic performance. Now the market expects interest rates to decrease. This was fueled by the Fed Chairman Powell’s comment that he was concerned about economic weakness and that the Fed would act as “appropriate” to sustain the recovery.

To add to that, European Central Bank President Draghi recently announced that the ECB was ready to extend bond purchases or cut rates to sustain economic growth and the Bank of Japan seems poised to make its policy more accommodative. Given all this, emerging market central banks are likely to follow suit.

Fed policy has historically aligned with market expectations

Source: Bloomberg, World Gold Council, Ventura Securities ltd

As gold prices historically have an inverse correlation with interest rates, the price of the yellow metal has been rising.

Geopolitical tensions are mounting

There are a number of geo-political risks bubbling all around us.

Despite several rounds of trade talks between the US and China, there doesn’t seem to be any amicable and mutually beneficial solution in sight. Being leading nations, what transpires between these two giant economies impacts the world at large.

Then there is the tension between the US and Iran, which was triggered when an American drone was shot down over Tehran. There are fears that the ongoing conflict, involving US sanctions against Gulf nations, could spiral into a war that draws in wider geographic regions.

Last, but not necessarily the least, is the uncertainty surrounding the Brexit and the political and economic impacts it could have for the UK and Europe and eventually, the world.

Whenever geo-political tensions arise, investors flock to gold, which is considered a safe haven at such times.

The import duty on gold could go up

While presenting the Union Budget on 05th July 2019, Finance Minister Nirmala Sitharaman proposed an increase in the customs duty on gold and other precious metals from 10% to 12.5%. This rise in the import duty is expected to reduce India’s current account deficit marginally in the coming years.

However, if this proposal is accepted, the precious metal will become more expensive in the domestic market since a large part of India’s annual consumption of gold is imported. During 2018-19, the country’s gold imports dipped about 3% in value terms to USD 32.8 billion but in volume terms, it remained strong at 982 tonnes.

Year

 India Gold Import in Tonnes Gold Import value (USD Billion)

2015-16

968 31.8

2016-17

778

27.5

2017-18 955

33.7

2018-19 982

32.8

Source: Ventura Securities ltd, Business line

Commodity market bulls are alert to this trigger and have already started their charge.

 

While these factors explain the gold price rise at a fundamental level, what do our charts say?

Technical pattern suggest gold is going to outperform

The turnover in precious metals on MCX has increased over the past one year mainly due to volatility in the Rupee-Dollar exchange rate and other macro-economic fundamentals. The average daily turnover crossed the benchmark level of Rs 4000 cores by September and by June 2019, it gained momentum and headed for 10000 on daily basis due to currency fluctuations, geopolitical tensions and international macroeconomics.

On July 5th MCX Turnover hit a historical high of 16k crores, mainly due to the increase in the import duty on gold and international macro-economic factors.

Source: MCX, Ventura Securities Ltd; Note: Only daily turnover of MCX Mega Gold Contracts

Now, a look at the monthly chart for Comex Gold reveals that the price has formed an ‘Inverted Head and Shoulder pattern’. In fact, the price has broken the neckline on a monthly basis and it can be expected to march north towards around 1670/1680 dollars in the coming months. On the downside, we expect the price to take an immediate support at the neckline (1350) for the short term. But overall the trend for gold is ‘Up’.

 

Source: Telequote, Ventura Securities

Where our view on MCX Gold is concerned, MCX Gold Aug is trapped in a channel line and facing resistance at 35,075 (Aug 2013 High). Once it breaks above the line on a daily closing basis, we expect it to head towards Rs 36,000 in the coming days/weeks.

So, once again, the overall trend is Positive and ‘Buy on Dips’ is suggested for Gold.

 

Note: Any change in Rupee appreciation/depreciation against Dollar may impact our views in MCX Gold.

Also read our blog article Gold Regains its Glitter.

Disclaimer:

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that: We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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