While gold was steady after surging to a record high in the previous session, more upside is likely as investors remain nervous about the global economic recovery. Investment demand is at its peak. The world's largest gold-backed exchange traded fund (ETF), SPDR Gold Trust, said its holdings rose to 1,298.6 tonnes by September 14, from 1,292.6 tonnes the previous day. The holdings hit a record 1,320.436 tonnes on June 29.
The most important factors for the rise are zero interest rates in key global markets and the projection that world economy outside Asia still seems unstable, anchored by the US Federal Reserve's determination to keep rates down, which makes gold an attractive investment.
What is the way forward for gold? So long as economic uncertainties continue, stock markets remain subdued, inflation fears do not abate and the easy money policy followed by governments stays conditions will support the yellow metal.
We will soon enter a seasonally strong demand period – the last quarter of the year. The latest World Gold Council report on demand trends shows that jewellery demand fell eight per cent y-o-y in the second quarter, while industrial demand rose 14 per cent y-o-y. The demand in India fell two per cent year-on-year in the second quarter, which is much better considering the 20-30 per cent rise in prices. With the southwest monsoon performing satisfactorily, hope that the Indian physical demand will improve in the coming months is gaining ground. Gold has also become a compulsive part of an investor’s portfolio to offset the risks posed by other assets and the economy in general. In the past, it was only the dollar which enjoyed the safe-haven status. This is the reason gold has lost its conventional inverse co-relation with dollar.
Going forward, uncertainties persist globally. And this is going to continue to keep gold prices underpinned and keep re-stoking investment demand. News of additional central bank buying should also support gold well.
On the negative side, apart from IMF selling further gold, and possible profit-taking or a sharp fall in stock markets could pressure gold for margin funding. Positive economic data from the the US could ease the safe haven demand and lead to redemptions in ETF’s.
Technically, we see $1,285 or even higher to $1,300-1,345 as being toppish in the near-term. A good corrective decline up to 10-15 per cent looks likely from there. In the domestic markets too, while the exchange rate remains stable we favour another rise of up to Rs 19,500-19,750 with an outside chance of even reaching Rs 20,000 per 10 grams. Subsequently, a sharp corrective decline of almost 10 per cent can be expected.
The author is director, Commtrendz Research.
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