Gold prices are likely to remain in an uptrend in the near term on a weak US dollar. The greenback is expected to remain weak as unlike market expectations, the US Federal Reserve (US Fed) was slightly dovish even as it raised interest rate by a quarter point on Wednesday. But, the medium- to longer-term outlook for the yellow metal remains bearish as US Fed chairman Janet Yellen hinted at two more interest rate hikes this year.
Since the US central bank raised interest rate, international gold prices jumped by around three per cent before settling with a marginal profit-booking at $1,229 an oz on Friday in London. Investors were convinced that the scheduled interest rate hike was already factored in before it actually happened. Earlier, expectations of aggressive rate hikes by the US Fed had also led to gold prices falling by nearly $100 from its recent peak to around $1,200 an oz, before the rise on Wednesday.
“Markets had discounted the interest rate hike as unlike European Central Bank, Bank of Japan, Reserve Bank of India or any other central banks that takes surprised decisions, US Fed prepares the market before the decision. So, the Fed’s interest rate hike was known and already factored in before it actually happened. Now, Fed is convinced with inflationary pressure hence, the interest rate hike. Historical evidence proved that gold remained as hedge against inflation which would continue this time as well. Consequently, we expect gold to hit $1,257 and then $1,284 an oz translating thereby Rs 29,250 per 10 gms in India in near term," said a market expert.
Standard gold in Mumbai’s popular Zaveri Bazaar, however, has risen by just 1.5 per cent since Wednesday following global cues, but the gains were capped due to an appreciating rupee. The Indian currency has gained 1.7 per cent since its closing value on March 10; it has appreciated 0.3 per cent against the dollar since Wednesday.
“With the stable government at the Centre, gold might temporarily lose a bit of steam with investors, but the safe haven appeal would continue with the global uncertainties on radar. In long term, however, a safe range of $1,180-1,195 an oz for gold and $16-16.30 an oz for silver would be a good investing point. This would translate into India price of Rs 27,500-27,850 for gold and Rs 39,000-39,500 a kg for silver,” said Prithviraj Kothari, Managing Director, RiddiSiddhi Bullions Ltd, a leading bullion dealer in Mumbai's Zaveri Bazaar.
The Fed’s interest rate increase by 0.25 per cent on Wednesday set the tone of similar two hikes in 2017. An increase in US interest rates is generally positive for dollar while emerging markets and gold get affected.
While there could be countervailing factors that outweigh this effect as feared by the Societe General which cites political risk, the French investment bank has trimmed its average gold price target by $100 to $1,175 an oz now for the period between January–March 2017, from its previous estimates of $1,275 an oz. The bank forecasts gold price to come under pressure by the July–September 2017 quarter.