Gold Outlook: Weaker dollar and geopolitical risk to underpin gold price

The price of gold has risen recently after a two-month downtrend, due to a weaker dollar and the market factoring in a geopolitical risk premium after the Saudi Arabia-led coalition's attack on Houthi rebels in Yemen.

On the physical side, demand from China and India has had a good start but higher prices saw demand ease later into the quarter. On the other hand, hedge funds have been reducing their holdings in Comex, which as on March 17 was the lowest since November 25. In a similar vein, gold exchange-traded fund holdings are down 190 tonnes since the beginning of the year. With these factors in the background, we look at what 2015 holds for the gold price.

First, taking a look at the US macroeconomic backdrop, at the time of the previous Federal Open Market Committee meeting, the economy appeared to be accelerating nicely and growing persistently. Since then, a series of indicators have suggested a slowing in the pace of US economic activity. Moreover, the stunning, at times seemingly unrelenting, rally in the dollar against most currencies over the past nine months or so is clearly a drag for exporters and, for that matter, making imports more competitive against domestic producers.

This is highlighted by the trade-weighted dollar rising a quarter since June. On the flip side, the committee was also aware that the latest non-farm payrolls, showed employment far above expectation at a very impressive 295,000. There have now been 13 consecutive months of increases of 200,000 or more on payrolls. We view the statement as balanced, rather than a giant leap in either a hawkish or dovish direction. We think it is still likely that the Fed will increase rates, albeit probably very slowly, from this June.

Analysing the effect of geopolitical tensions on the gold price, Russia was in the highlight last year. To put this in perspective, the Russian central bank last year purchased 173 tonnes. This was fuelled by two factors. First, a desire to try and support the ailing rouble, a policy which has proved unsuccessful. Second, a growing belief that Russia does not want to buy dollars (or other western currencies and assets). Also, political tensions in West Asia, a region historically known for its natural pull on physical gold, have frequently provided a strong boost to its prices, as noticed in 1978-1980, 1990 and 2013.

Looking at the price trend, the average gold price in India had declined by 3.5 per cent last year, marking consecutive year's fall. The two-year trend might pause this year with stability in prices, as the dollar-rupee exchange rate is projected to average 62.1, ranging from 60.5 to 65. And, with our forecast for gold to average at $1,170 this year, with the upside being capped near $1,340, we expect gold prices in India to rise seven per cent from the current Rs 28,700 per 10 g and be in a trading range till Rs 25,500.

The author is senior analyst-precious metals, GFMS Thomson Reuters