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Stephen Rego

He has been a journalist since the mid-1980s, and has spent close to two decades tracking the gem and jewellery industry while holding different editorial positions in industry specific publications and websites

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BW Businessworld

Investors Return to Gold Amidst Economic Uncertainty

Gold prices have continued to strengthen this year, rising by nearly 20 per cent as the first half of 2016 draws to a close, driven largely by jittery investors seeking safe havens in turbulent global markets

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The last week saw gold prices touching new highs and crossing the US$ 1,300 per oz mark for the first time in six weeks, following uncertainities in the financial markets in US, UK and India. But, just as it seemed set to soar further on Rexit and Brexit fears, the yellow metal plateaued out early this week, with a small dip as prices hovered between US$ 1,280 and US$ 1,290 across different regions.

The immediate easing was on account of opinion polls which indicated that Britons may vote against withdrawal from the EU later this week. A recovery in Indian equities and currency markets (that had dipped on Monday morning in response to the news that RBI Governor Raghuram Rajan would be returning to academia when his term ends in September) following relaxation of FDI rules also helped. A resurgence of the delayed monsoon over the weekend also played a role in easing market sentiment.

But the underlying fears and uncertainties meant it was a relatively short-lived rebound, and gold prices could continue to vacillate over the next few days as well.

Last week’s rally in prices was initially triggered by the US Fed announcement that it was deferring an expected increase in interest rates for the time being. The immediate causes for the postponement were two reports released by the US Labor Department. The first indicated that the US added 38,000 jobs in May, the lowest number of monthly jobs added in nearly six years. A subsequent survey also indicated that the rate of hiring fell to 3.5 per cent in April which was the lowest recorded in nearly two years.

The formal announcement followed a few days later, with US Fed chairperson Janet Yellen stressing that though inflation is below the 2 per cent long-term target level, and the growth in household spending as well as housing sector demand has strengthened, job gains have diminished and business fixed investment has been soft.

Further fuelling the nervousness was the uncertainty regarding the June 23 referendum in Britain over its continuing as a part of the European Union or not. Tensions over the Brexit poll saw gold rise to a three year high in local currency terms reaching GBP 909 per oz late last week, though they also eased subsequently.

Most analysts believe that a vote in favour of exiting the EU will cause a spurt in prices. A HSBC note predicts that while there could be a 10 per cent spurt in prices to over US$ 1,400 levels should the referendum be in support of an exit, a vote in favour of retaining EU membership would not trigger a major sell-off by investors.

Gold, the safe haven for jittery investors, has proved its attractiveness in this uncertain environment. Holdings in SPDR Gold Trust, the largest global gold-backed ETF has crossed 900 tonnes, surpassing levels last reached in 2013.

Not many would have predicted such a bull run when gold closed 2015 at US$ 1,060 following a 10 per cent decline in the preceding 12 months. Most analysts, in fact saw gold hovering at US$ 1,000 – 1,100 levels during 2016, with some even suggesting it may dip below US$ 1,000 per oz. However, the metal has bounced back significantly with an approximately 20 per cent gain in the first five months of the year. Prices are about 9 per cent above a year ago levels, but over 15 per cent below the levels that prevailed five years ago.

As the first half of the year draws to an end, not many will want to guess what the trajectory of prices will be in the next six months!

Tags assigned to this article:
gold yellow metal raghuram rajan Brexit us federal reserve