Gold gets its safe haven status back

Surge in price over recent days attributed to perception of turmoil in West Asia and the US Fed's dovishness on inflation; further trend depends on events

Gold is again seen as a safe haven, with prices up 5.5 per cent in the past few days. On Friday, at the spot market here, gold was up 2.1 per cent to close at Rs  28,450 per 10g.

In three weeks, gold has risen 5.8 per cent here, from a low of Rs 26,900 for 10g. Internationally, it was up 5.5 per cent from a low of $1,243 an ounce; silver also went up 10.9 per cent from Rs 40,850 per kg to Rs 45,300 a kg on Friday.

On Thursday evening, it crossed $1,300 an oz in the international market and now trades at $1,312 an oz. Much of Thursday’s buying was technically driven, after prices moved higher in response to a dovish tone from the US Federal Reserve and sustained concerns over Ukraine.

However, traders and analysts have started talking of a trend change. Nic Brown, head of commodities research, Natixis, said: “The price pushed above $1,300/oz this week as instability in Iraq raised concerns that the whole region is at risk of falling into a sectarian war, which could materially affect the supply of oil.  As such, gold once more offers a safe haven refuge for investors.  At the same time, Fed Chair Janet Yellen’s message at the FOMC (Federal Open Market Committee) this week was supportive for gold.  In the face of rising inflation, the Fed acknowledged that interest rates might rise sooner than expected but argued that the peak in the hiking cycle should be lower than previously anticipated, due to the lower long-term potential growth rate of the US economy.  The resultant weaker dollar, along with the Fed’s apparent lack of concern about rising inflation, helped to provide further support for gold prices.”

For India, the premiums for physical delivery, the major factor influencing prices since the import restrictions in place for almost a year, have remained around $20 an oz. For, there is wide expectation that the Union government will cut the import duty on gold in the coming Union budget by two per cent. An analyst of a foreign research firm said on condition of anonymity that the lower premiums suggest the market is discounting the possibility of a duty cut. In the market here on Friday, market premiums were quoted around $20 an oz.

  Technically, gold is in an overbought position, as the rally has been too fast. Rhona O’Connell, head of metals research and forecasts, Thomson Reuters, said: “Profit taking already appearing looks to me as if this is a short-lived burst, as there is no demand backing the price rise.  So, I would look for a downward correction from here, as the market is overbought. We would expect a drift lower over the next few weeks and then some improved strength developing, perhaps in late August, and then also in September.”

To support her views, data of the largest exchange traded fund, United States’ SPDR shows investors had sold gold in the past three days. Its holding on June 13 was 787 tonnes, marginally down to 782.6 tonnes on Thursday in the US.

Going forward, as Nic Brown puts it, “gold prices will continue to depend heavily upon these two factors.  If the Fed is seen to disregard additional signs of building inflationary pressures, then gold prices might have further to rally.  If tensions in Iraq continue to escalate, and neighbouring countries find themselves being dragged into the conflict, then gold’s safe-haven status will remain attractive for investors, especially if oil prices continue to rally.”

The risk to India is that higher oil prices might once again lead to a deteriorating current account balance, as well as raising inflationary pressures, both of which might be expected to weaken the rupee. This will only add to pressure on gold’s price in Indian markets.