Gold regains safe haven status

By Arjavi Indraneesh

MUMBAI: Gold is re-emerging as a safe haven, leading to record price levels amid the turmoil in other asset classes.

The World Gold Council says gold’s performance in the near term is heavily influenced by perceptions of risk, the direction of the dollar, and the impact of structural economic reforms. As it stands, these factors likely will continue to make gold attractive, the Council points out.

Gold prices in India have touched an all-time high, with spot gold climbing above Rs 31,000 for 10gm, accompanied by a rise in futures prices to Rs 31,115, bettering the previous high of Rs 31,035. Nymex saw gold rise 2% to $1677.50 an ounce, its highest level since April 2013.

Analysts see continued demand for gold as investors once again seek tail-end protection against increased volatility and uncertainty across other asset classes. Hedge funds turned long gold in early December after having traded it from the short side for six months. According to analysts, this pickup in demand together with a continued accumulation from long-term investors through exchange-traded funds should provide enough support for gold to break higher towards the key area of resistance between $1,360 and $1,375 per ounce where consecutive highs were set between 2016 and 2018.

A drop in US 10-year bond yields to a near one-year low, reduced expectations for further rate hikes, a dollar that has stopped rising and, not least, the turmoil in global stocks have all supported renewed demand for gold as well as silver, given its historical cheapness to gold.

The World Gold Council has attributed the positive outlook for the yellow metal on the surge in Indian economy as well as the impact of China’s Belt and Road Initiative. Emerging markets, making up 70 percent of gold consumer demand, are very relevant to the long-term performance of gold. And India and China stand out in this respect.

The Council points out how the two countries have begun to implement economic changes necessary to promote growth and secure their relevance in the global landscape. It refers to India’s efforts to modernise its economy, reducing barriers to commerce and promoting fiscal compliance and points out India’s economy is expected to grow by 7.5% in 2018 and 2019, outpacing most global economies and showing resilience to geopolitical uncertainty.

“Given its unequivocal link to wealth and economic expansion, we believe gold is well poised to benefit from these initiatives. We also believe that gold jewellery demand will strengthen in 2019 if sentiment is positive, while increase marginally should uncertainty remain,” says the latest WGC report.

Similarly, efforts to promote economic growth in western markets are expected to result in positive consumer demand, as has been observed generally in the US since 2012.

As a consumer good and long-term savings vehicle, gold demand historically has been positively correlated to economic growth. As a safe-haven, its demand historically has been strongly responsive to periods of heightened risk. In the short and medium term, however, the level of rates or the relative strength of currencies, as well as investor expectations, can either enhance or dampen gold’s performance.

The report says that in longer term outlook, gold will be supported by the development of the middle class in emerging markets, its role as an asset of last resort, and the ever-expanding use of gold in technological applications.

In addition, central banks continue to buy gold to diversify their foreign reserves and counterbalance fiat currency risk, particularly as emerging market central banks tend to have high allocations of US treasuries. Central bank demand for gold in 2018 alone was the highest since 2015, as a wider set of countries added gold to their foreign reserves for diversification and safety.

In addition, gold speculative positioning in futures markets remains low by historical standards after hitting record lows in the final months of 2018. Furthermore, net combined speculative positions are negative for the first time since December 2001. And large net short positions have historically created buying opportunities for strategic investors, as such positions are prone to short-covering adding momentum to price rallies.

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