Gold continues to add sheen in 2019

Image for Rpresentation

2019 has proved to be one of the best years for Gold returns as prices have risen by 15% on the domestic front, getting some support from weakness in the rupee that has fallen by 1.4% against the US dollar. Gold prices have shown strong signs from the start of the year following a lot of distress related to trade war between US and China, geopolitical tension and Brexit uncertainty. These factors lead institutions like IMF, OECD and World Bank to trim their global growth forecast not only for this year but for the coming year as well. Central banks across the globe also turned dovish since the start of the year adding further gains for gold.

Diwali fireworks for gold

India is one of the largest consumers of gold and the festive season does attract a lot of buying, but one should not forget that India’s dependence on monsoon does also reflect on the buying pattern of gold. India’s agricultural sector accounts only for around 14% of the country’s economy, but for 42% of total employment, which suggests that the sector does influence the gold buying pattern in India. 

Rural India accounts for about 60% of the 800-850 tonnes of gold consumed in the country, good rainfall gives the power of buying to farmers increasing overall gold demand, and hence demand and supply in these parts becomes important to gauge the prices. This year, monsoon rainfall is 5% above the long period average (LPA) with Kharif sowing just 0.2% lower than last year.

Gold demand has remained subdued for previous festivals, Dussehra sales were 20% lower than previous year and at the same time, higher prices could dent the overall demand in Deepavali as well.

Elevated prices and hike in import duty by 2.5% also took a hit on gold imports that were down 12% in 2019. Gold imports for 2019 have been to the tune of ~565 tonnes until September compared to ~644 tonnes in the same period last year.

Since the last Deepavali, gold has outperformed across major asset classes and this year returns have been to the tune of 21%, with equities giving a return of 10%.

Shines amid tensions

It’s been over a year since the talks between the US and China has been on, triggering a global slowdown in growth. The latest meeting between US and Chinese officials has been positive and the US President has already hinted at inking the deal when he meets the Chinese premier in November.

Looking at past experience, uncertainties related to trade war have not completely ended but talks seemed to be moving in the direction. Gold back ETF’s hit record highs in the month of September and total gold holdings increased by 75.2 tonnes to 2,808 tonnes, according to WGC.  

Recently the British Parliament voted against the UK Prime Minister’s Brexit deal despite agreeing to it at the EU summit. Lawmakers voted 322 to 306 in favour of an amendment that turned Johnson’s planned finale on its head by leaving the prime minister exposed to a humiliating obligation to ask the EU for a delay until the end of January 2020.

Parliament will vote in the second reading on legislation known as the Withdrawal Agreement Bill on Tuesday, after which amendments can be proposed to it. This suggests that the uncertainty will not settle as easily as it looks and could continue to support gold prices.

Central banks remain dovish

Central banks have been one of the major highlights of the year with the start being a little hawkish, but as the economies started to feel the stress they have turned dovish.

From the Federal Reserve to ECB to BoE, all of them have been dovish. Central banks started to cut rates. With increasing global slowdown concerns, central banks have been enticed to buy gold and used it as a tool to safeguard their economy. Among the buyers, China, Turkey, Poland and Russia have been top buyers in this year but other developing as well developed nations have not been far behind and did add some to their kitty. 

Outlook

We expect that positive momentum for gold could continue further but the pace of rally could get measured as uncertainties related to trade war is taking back seat. Brexit related uncertainty could take a pause as the deadline could be extended to January. But we are of the view that the slowdown in major economies could push central banks to remain dovish for an extended period and that could continue to support gold prices.

Elevated prices will remain a point of concern, but with a fair monsoon and festive season approaching it will be important to see the movement of gold prices on domestic bourses. On the domestic front, India has also added gold to its reserves and with a dovish outlook on the economy, gold could continue to outperform.

On the domestic bourses, we expect that ease off in trade war could lead to some correction in prices, but until ₹35,500 is held, we remain bullish and expect it move higher to test previous highs of ₹39,500 followed by ₹41,500 over the next 12 months.

The writer is  VP- Commodity Research, MOFSL

DH Newsletter Privacy Policy Get top news in your inbox daily
GET IT
Comments (+)