Gold hits 33-month high on risk aversion appetite

Weak response to Japan bond purchase indicates investors' lack of confidence in govt securities

Gold prices rose 0.68 per cent on Wednesday to hit the highest in 33 months on the back of investors’ growing confidence in the yellow metal as a hedge against portfolio risk. Silver jumped the highest since March 2014.

Standard gold increased 0.69 per cent on Wednesday to close at Rs 31,450 for 10 gms. In global markets, gold sustained its surge, surpassing $1,360 an oz for the second time in 2016, a level previously seen in early 2014. This has been gold’s largest continuous gain since the European sovereign debt crisis in 2010 and 2011.

Gold has been one of the best performing assets so far this year, outpacing all major benchmark indices and with comparable volatility to stocks. It has also outperformed crude oil, whose prices have plunged since the end of June.

“Investors are using gold to hedge portfolio risk as they add more stocks and low quality bonds to their asset mix. Gold has provided an alternative to balance the long-term risks of fiat currencies and ineffective monetary policies. The surge in gold prices was driven in part by weak demand during the 10-year Japanese government bond auction on August 2, as investors have begun to question the effectiveness of unconventional monetary policies,” said the latest report from the World Gold Council.

Amid rising uncertainty in global financial markets after Britain’s exit from the European Union and the recent slowdown in emerging market economies, Bank of Japan (BoJ) announced an expansion of its quantitative easing policies. BoJ doubled its purchases of exchange traded funds (ETFs) to an annual pace of six trillion Japanese yen ($60 billion) and at the same time doubled the size of its US-dollar lending programme to $24 billion. Many investors, however, were disappointed as the market was anticipating larger increases to asset purchases and/or further rate cuts.

“We believe the weak JGB (Japanese government bonds) auction and ensuing sell-off in global sovereign bonds this week suggest that investors may be losing confidence in government securities,” the WGC report noted.

In rupee terms, gold price has jumped 26 per cent, or Rs 6,435, for 10 gms following the movement in the international markets. Silver gained 55 per cent this year to trade at Rs 48,495 a kg.

“Gold’s physical demand has declined drastically due to price rise. At the same time, inflow of scrap jewellery has increased. But, gold’s major support is seen at $1,384 an oz (Rs 32,500 per 10 gms). On reaching this level, however, a profit booking correction might come,” said Prithviraj Kothari, managing director, RiddiSiddhi Bullions.

Gold is selling in India with a discount of Rs 700 for 10 gms.

Analysts have revised their forecasts upwards. UBS expects $1,400 an oz for the end of the year, while Credit Suisse and Bank of America Merrill Lynch peg it at $1,500 an oz over the next six months.

IBJA to award 1 kg gold to Olympic winners

Premier industry body the India Bullion and Jewellers Association (IBJA) has announced to award 1 kg of gold to Indian winners in the Rio 2016 Olympics scheduled to be held between August 5 and 21 in Rio de Janeiro, Brazil.