IS GOLD MAKING A COMEBACK?

Gold has fallen nearly 40% from its 2011 high above $1900 to reach below $1200 at the start of the week. A resurgent dollar, coupled with positive U.S. economic data, had been driving gold’s declines over the past few weeks. Investors tend to withdraw from non-interest-bearing assets to seek higher yields elsewhere when the dollar gains.
But gold picked momentum in the past seven days. We finally saw gold catching a bid on global risk aversion. It has rebounded nearly 4 percent from the 15-month low of $1,183.46 it hit on Monday on heavy selling pressure that followed a better-than-expected U.S. payrolls report last week.
There were various factors responsible for the rise in prices-
  • The end of QE
  • Geopolitical uncertainty
  • Falling global growth estimates
All these factors once again made gold a good prospect as a safe haven asset.
On the second day of the week, gold was up after the  International Monetary Fund cut its global economic growth forecasts and weak German industrial data stoked further concerns. Following this the dollar fell which further gave a push to gold prices.
Gold rose consecutively for four days marking its longest winning gain in seven months. In fact traders witnessed heavy short covering for gold rise over the Fed minutes which created uncertainty over the timing of a Fed interest rate rise.
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The minutes of their last policy meeting showed that they are still struggling to come to grips with the dual threats of a stronger dollar and a global slowdown and hence they were further uncertain about linking the interest rate rise to U.S economic progress. Equities further weakened on concerns over global growth mainly in China and Europe.
Gold prices bounced off 2014 lows this week after testing support around the $1,180 area, a price gold hadn’t seen since June and December 2013. Analysts said short covering, which is the buying back of previously sold positions, and the return of Chinese traders from their Golden Week holiday helped return the yellow metal above $1,200.
However, In India it’s a different scenario this year. Last year the volumes were much high as people rushed to buy gold, when prices crashed. This year prices have been consistently low. Moreover, disappointing monsoons and continued import restrictions have also affected gold demand in India.
Now the market awaits movement in equities, dollar and crude oil which could have a major role in influencing gold prices. Also, gold-market watchers will keep an eye on the Indian market to gauge metal demand ahead of the Diwali holiday later this month. Apart from this, the market player will also watch the economic data that will be flowing in- China releases a slew of economic reports, while The U.S. will see inflation data with the producer price index expected to show falls in energy and food prices, reflecting the recent drop in commodity prices.
If the US equities market continue to drop then it could create a favourable position for gold but if investors flush in more money into equities keeping the “buy on dips” funda in mind then we could see the dollar rally and gold would once again be pulled back from its gains.

Current view: BUY ON DIPS

Trade Range:

METAL INTERNATIONAL
price range

DOMESTIC
price range
GOLD  $1207 – $1242
an ounce
Rs.26,500 – Rs.28,000
per 10 gm
SILVER $16.85 – $17.85
an ounce
Rs.38,000 – Rs.40,000
per kg

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