Trade tensions, Brexit uncertainty to keep gold rally going
In recent weeks, gold has been consolidating in a $100 range ($1,450-$1,550 per ounce).
The volatility in gold prices in recent times is a testament to the fact that investors’ community has turned its focus to the yellow metal once again.
This interest is reflected in the price variation in the period from January 1 to September 4, wherein global gold prices have risen 18 per cent, which is more than the previous two years’ gains.
In 2018, spot gold prices gave a negative return of 2.1 per cent while in 2017 rose 13.1 per cent. Conditions were different then when compared to the current context wherein the global uncertainty is at its highest.
While we look at history as a barometer for any asset class performance, and history tends to repeat is a common belief in financial parlance, whether the recent performance of gold will tend to repeat for rest of 2019 is a question that needs to be pondered.
In the recent weeks, gold has been consolidating in a $100 range ($1,450-$1,550 per ounce). Let us prognose the current set of factors dominating the yellow metal.
Trade and tariffs continue to dominate global headlines
The US and China trade and tariff war sees no signs of ending as two global powers are due to meet on October 10-11 for negotiations. The meeting will be closely watched by investors across the globe as the outcome will result in further accelerating or decelerating of tariff increases by the US on China. Existing 25 per cent tariffs on the commodities imported by the US will attract an increase of 5 per cent taking the total tariff to 30 per cent effective October 15.
On the other side, slowing global growth, lingering trade tensions and more rate cuts by the US Federal Reserve is a solid mixture for gold prices to rally. The US Service sector activity at a three-year low in September, following the manufacturing sector, which contracted to the weakest level in a decade further brightens the prospects for the yellow metal to rally from the current levels of $1,500.
The Institute for Supply Management (ISM) said its index of non-manufacturing activity fell to 52.6 from 56.4 the month before. The business activity index fell to 55.2 from 61.5 the month before. The employment index fell to 50.4 from 53.1 a month earlier, hitting its lowest level since February 2014. New orders dropped to 53.7 from 60.3. The ISM said its index of national factory activity fell to 47.8, the lowest reading since June 2009.
Pendulum for Brexit is ticking fast
Brexit situation has been dominating the stage for the past two years. The final deadline for Britain to exit the European Union with deal or no deal is an uncertainty that will leave investors with no place to go, but to scout for safe havens, hence, gold is a right place for them at least for a months’ time till the world knows the situation of Brexit.
Whatever be the state of Brexit, it is clear that uncertainty is the rule of the game and any volatility stemming out of the UK and the EU will further push investors towards gold as an asset class in the coming months.
The way ahead
The complex set of factors discussed clearly indicates uncertain times as far as the global economy is concerned. With central banks in an easy monetary policy mode along with simmering tensions between the US and China, Brexit and its related uncertainty will lead investors to move from risk assets and go in to safe haven assets which will include gold as well as dollar assets.
In a month time frame, we expect spot gold prices to trade higher towards $1,560/oz mark in the international markets, while MCX gold prices will move higher towards Rs 39,300 per 10 gm mark in the same time frame.
(Prathamesh Mallya is Chief Analyst, Non Agri-Commodities & Currencies at Angel Broking. Investors are advised to consult financial advisers before taking an investment calls based on these observations)