India may be out of step with world gold rally

Experts say the yellow metal may test $1,475 by the year end

Gold has faced a bumpy ride during the past few months but after an initial dip following the election of Donald Trump as US president the price of the metal has scaled back to $1,250 per oz. 

Nikos Kavalis, director of Metals Focus, which released its annual report on gold for 2017 today, said, “In early March, hawkish comments from some US Federal Reserve officials weighed on investor interest towards gold. 

However, following the March meeting, information released by the Fed suggested that most FOMC members stood by the view that two more rate hikes were appropriate for the rest of this year. 

This is something that the market had largely priced in since late 2016.” 

This helped gold recoup most of its losses from end-February. “We believe that negative real interest rates plus several tail risks should yield further gains for gold as institutional investor interest in the metal grows. Prices may, therefore, test $1,475 before the end of this year,” Kavalis added.

This is among the most bullish outlooks on bullion. Bloomberg quoted Ronald-Peter Stoeferle, managing partner at the Liechtenstein-based company Incrementum AG, as saying, “Gold is poised to rally to levels last seen four years ago as rising inflation and negative real interest rates combine to boost demand. Prices may climb to $1,400-1,500 an oz this year.”

While upgrading the gold price forecast, Metals Focus said real short-term US interest rates would remain negative well into 2018. Real interest rates across several other currencies, including the euro, are also expected to remain negative for some time, according to Metal Focus. 

“We believe consensus expectations about the US economy remain overly optimistic. In the face of budgetary limitations, and a tendency for fiscal prudence among Republican legislators, the new administration’s fiscal policy will fall short of expectations,” Kavalis added.

He saw this as a risk for equities which had been rallying on expectations of rising earnings and a stronger US economy. The US stock market has seen some sell-off in the last few days.

Metals Focus also said the wider macroeconomic and geopolitical climate faced at least as many risks as last year. Uncertainty over the US administration’s trade and foreign policies, populism in Europe, the Brexit negotiations, tension between Russia and Europe, Middle Eastern conflicts, and China’s economic woes were all likely to continue simmering, encouraging interest in safe-haven assets, it added.

One area that is unlikely to provide much price support this year is the physical market. While the decline in jewellery demand will be modest, it follows uninterrupted losses since 2014. This will leave the global total at its lowest level this decade. 

Low jewellery demand also means lower recycling and coupled with mine production growth running out of steam, will be positive for gold prices, according to Metal Focus.

In India, however, a falling dollar will cap gains. Anuj Gupta, head of research (technicals) at Angel Commodities, said, “We see gold rising due to uncertainty over Trump’s policies, and the near-term Fed rate hike will curb gains to $1,300-1,320 an oz. An in extended rally may touch $1,400 an oz. On the MCX, gold will not move in tandem but we are expecting MCX gold will touch Rs 30,000-30,500 per 10 gm in the next three to five months.”

Nigam Arora, international bullion analyst, tempers this view. “If the Fed aggressively raises rates to counter inflation, the dollar will get stronger,” he said. “The most probable scenario is that Trump will get a few things done and the Fed will be moderate in raising rates. In this scenario, gold will be range- bound,” he added.