Commodity watch: Current consolidation in gold good for future uptrend

The consensus on gold is that interest is back. Market participants believe that sentiment on the precious metals has turned more bullish. With central banks like China buying gold for the first time in years and funds that were previously not interested in gold starting to add the metal to their portfolio, investors have been showing more confidence.

Gold could offer the best protection for investors as fears of a recession continue to rise. Two important measures are at levels not seen since World War II -- global debt is at record highs and central banks are buying gold at unprecedented levels. According to data from the World Gold Council, central banks bought 651.5 tonnes of gold last year, the largest increase in global reserves since 1971.

Rising global debt also continues to attract market attention. According to data from the Washington-based Institute of International Finance, total world debt is hovering near a record at $244 trillion, more than three times the size of the global economy. The global debt-to-GDP ratio exceeded 318 percent in the third quarter of last year, despite a stronger pace of economic growth, according to a report by the Washington-based IIF.

Although gold prices are struggling to find new momentum, global uncertainty and rising market volatility pushed prices above the critical psychological level of $1,300 an ounce.

Central banks invest in gold for many reasons. There are well-known reasons such as gold’s role as a safe haven asset and an effective portfolio diversifier. But research also reveals that there are other important reasons relevant to central banks, such as gold’s ability to improve risk-adjusted returns and its use as valuable collateral – both of which were viewed as relevant by 71% of central banks.

Global central bank gold reserves, as reported by the IMF, grew by almost 26 tonnes in December, down from 34.7t in November. Despite a month-on-month decline in demand in the final two months of the year, monthly central bank demand remained positive throughout 2018, with the annual total registering a multi-decade high. Heightened geopolitical and economic uncertainty prompted more and more central banks to diversify their reserves and re-focus their attention on safe and liquid assets. And the number of central banks who bought gold in 2018 – 23 according to the latest figures – highlights the importance of gold as a reserve asset. Net sales continued to be trivial by comparison, with nearly a dozen banks decreasing their reserves (by less than two tonnes on average) during the year.

The Reserve Bank of India (RBI) too, has bought gold for the first time in nearly a decade, signalling that the metal could be in demand as a store of value when returns and capital values of fixed-income bonds are declining in a rising rate environment. 

The RBI added 8.46 metric tonnes of gold to its stock of holdings during the financial year 2017-18 that ended June 30, taking the level of gold reserves to 566.23 metric tonnes, according to its latest annual report. It last bought 200 metric tonnes from the IMF to boost its reserves in November 2009. 

Technically, we are still above $1300 psychological support implying a floor for prices. 

Importantly, prices are consolidating, which is a positive sign for an uptrend to sustain and push higher. As seen in the chart, prices are consolidating ahead of a crucial resistance in the $1355-1395 range, where it has faced stiff resistance from 2013 onwards. We believe prices are headed in the near-term towards this range, but stronger factors needed to take it out and move higher. In the domestic markets, we expect prices to hover in the 32,500-34,000 zone in the coming months.

(The author is the Director of Commtrendz Research and these are only guidance for price direction. He is not liable for any gain/loss arising out of it. He can be reached at gnanasekar.t@commtrendz.com)