Gold to stay in positive zone
Precious metals can turn safe haven during political uncertainties in the US
Precious metals have made considerable recovery from mid-December levels. The dollar index will continue to control the price movements and the uncertainties arising out of the political decisions could trigger safe-haven interest in the metals going ahead.
Gold prices have seen significant ups and down in the past 3 months. At the beginning of November, prices stood at $1,287 per ounce. The US presidential election outcome saw prices jumping up to $1,337 per ounce on November 9. But they cooled as fast as they went up. Some of the post-poll announcements made by US president Donald Trump, especially in terms of building the infrastructure and fiscal spending lifted the market. The promises made on increased fiscal spending, tax cuts and infrastructure building have been strengthening the dollar to multi-year highs.
Meanwhile, the US Federal Reserve hiked interest rates first time after raising it once in 2015. The Fed also announced possibility of three hikes in 2017. In one month, gold lost more than $200 per ounce. By December 15, gold had touched a low of $1,122 per ounce. Gold started gaining from a technical pullback from such low levels. Moreover, there were doubts in the market about the implementation of the promises and their consequences on the US economy.
“Such huge spending is expected to increase inflation in the US. Gold is always an inflation-hedge and hence such a scenario will support gold pri­ces. Further, a strong currency is not conducive for exports. To keep the tr­ade balance intact, the dollar would have to shed some of its strength. This too is positive for gold,” said Hima­nshu Gupta, chief market strategist, Karvy Comtrade. From the multi-year highs, the dollar climbed down since the first week of January. This saw recovery in gold prices. Meanwhile, uncertainties with regard to Brexit and legislative approval of the referendum added to the safe-haven interest in gold. Gold has recovered more than $100 since mid-December lows and was trading at $1,225 per ounce last week.

The domestic gold prices closely followed the international pattern in movement, but gains were capped as the rupee gained strength against the dollar. Gold prices at the multi commodity exchange (MCE) stood at Rs 30,285 per 10 gm on November 1. It moved up to Rs 31,376 by November 11, fell to Rs 28,862 by December last week and has recovered to Rs 29,070 as on last week. In case of silver, the recovery since the beginning of the year has been faster than gold as the metal also gained from the positive trends in the base metal counter.
Silver prices in the international market moved from $18.32 an ounce on November 1 to $18.96 as on November 11. By December 26, silver fell to a low of $15.62 and has recovered to $17.73. In the domestic futures market too, silver prices had a same movement. From Rs 43,573 per kg in the beginning of November, it went up to Rs 44,790 on November 11. It dipped to Rs 38,325 on Dece­mber 26 and has recovered to Rs 42,465 per kg.
“Industrial metals have been gaining from announcements on infrastructure spending in China and the US. Further, the demand from photovoltaic cells in solar panels has been strong. Even otherwise, among the precious metals, silver is more volatile and it has gained 8-10 per cent since the beginning of the year,” said Gupta.
But fundamentals of precious metals are not strong enough to support upward movement going forward. The physical demand for metals is low in both India and China. The investment demand has been strong in 2016, but by the fourth quarter it moderated and gold-traded funds saw outflows as the dollar strengthened. The gold purchases by central banks too have come down significantly.
“The US economic data, especially those from the labour market has been positive for some time now. If the US Fed goes ahead with the three rate hikes, gold will lose much of its sheen,” Gupta said. In the short-term, gold and silver may see some corrections – gold to $1,180-1,170 and silver to $16.5-16. “But the likelihood of political uncertainties in the US after the new administration took charge can anytime bring back safe-haven interest in gold. By the later part of the year both gold and silver are expected to see gains,” he remarked.
Sangeetha G.