Escalation of North Korean tensions was just a trigger. Factors that can further the gold rally towards $1,400 in the international market and Rs 31,500 in the Indian market before the end of the calendar year are there in place.
Gold has gained around $40 per ounce in the past few days and Rs 1,000 per 10 gm in three sessions and most importantly crossed the psychological level of $1,300.
Gold had seen these levels last time in November 2016 when Donald Trump was elected US president. This time though prices were seen cooling off on Wednesday from $1,325 to $1,310 due to profit booking, but the rally is not yet over. This calendar year, gold had got closer to $1,300 twice in May and June, but could not sustain the gains. This time the macro-economic factors that are working in favour of the yellow metal are strong.
“During this September quarter or by the next quarter we expect prices to move up to $1,380 and then to $1,420. This means, gold will surge towards Rs 31,300 or Rs 31,500 levels in the Indian market,” said Himanshu Gupta, chief market strategist, Karvy Comtrade.
The US dollar, which has an inverse co-relation with gold, has been weakening for quite some time now on weaker economic indices. However, gold has not been able to make most of this weakness. Last week during the Jackson Hole meeting of Central banks, neither the US Federal Reserve nor the European Central Bank gave any hawkish statement. The market had expected them to talk about interest rate hikes. Federal Reserve’s stand pulled the US dollar significantly down.
As inflation has not risen to the 2 per cent levels targeted by the Federal Reserve, a rate hike in September may not be on the cards. This too has undermined the position of US dollar and strengthened the case for gold. “Despite lower interest rates, inflation has just picked up to 1.5 per cent and this is a cause of worry for the Fed. Though the unemployment data has been coming down, inflation remains a pain area,” said Gupta.
“Usually wages have to improve as the unemployment data comes down. This time wages have not increased and the employment that has been added also are largely temporary in nature. This underscores the concerns that the recovery is much slower that what was anticipated,” said Chirag Mehta, senior fund manager, alternative investments, Quantum.
The firing of an intermediate-range ballistic missile by North Korea over Japan was another trigger that took gold cross the $1,300 level after two unsuccessful attempts this year.
“There are investors who are flocking towards safe haven assets. This risk perception will keep them invested this time,” said Mehta. The demand for safe haven assets like gold also has to be viewed against the corrections in the global equity markets. Most of the equity indices are below their recent high levels and the markets perceive the weakness to continue for some more time.
Further, the fundamentals too support gold prices during the second half of the year. Usually the demand for gold is higher in the second half both in China and India.