Gold Outlook: Yellow metal glitters again

In 2016, the allure for the yellow metal as an asset class is back, as spot gold prices in the international markets have risen 18 per cent and comex gold has increased 18.5 per cent. On the MCX, gold prices have gone up 18.7 per cent. Spot gold prices (Ahmedabad) have also gained 18 per cent in the same time frame. Fall in global equities, inflows into bullion funds, weak dollar index and concerns over financial instability have been important factors for the recent rise. Besides, the metal has been helped by speculation that the Federal Reserve might not raise US interest rates this year, after the first rate hike in nearly a decade in December 2015.

Since the beginning of 2016, gold holdings in the SPDR Gold Trust have already surpassed the whole of 2015. In absolute numbers, gold holdings as on March 7, stood at 793 tonnes, an increase of 151 tonnes compared to December 31, 2015. Besides, Barrick Gold Corporation, the world's largest gold producer, has also cut its 2016 total gold production forecast, boosting prices. Although most of the Federal Open Market Committee policymakers are still expected to raise rates this year and even discussed a hike at the January 26-27 policy meeting, they were divided over how to interpret financial market volatility. The next meeting scheduled on March 15-16 will be closely watched by investors across the globe, as it will provide clues on further rate hikes.

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China and India consumer demand for gold has been the key component on the demand side supporting the price rise of gold. In 2015, both these nations have consumed nearly 55 per cent of the total global consumer demand of 3,196 tonnes.

The way forward

Stronger investment demand as indicated by the rise in gold holdings in the SPDR Gold Trust, investors' interest to buy on dips, weak consumer confidence data from the US are all push factors for gold prices to go higher from a three months' perspective.

European Central Bank cut its deposit rate deeper into negative territory and increased monthly asset buys to €80 billion from €60 billion, above expectations of a hike to €70 billion, as the central bank sensed that slowdown was bothering the real economy. Besides, a possible delay of rate hike by the US Federal Reserve in its next meeting will be a boost to gold prices.

As on March 1, 2016, fund managers were net longs at 122,539 contracts, when compared to net shorts at 17,949 contracts as on December 31, 2015, indicating a rise in speculative activity in the yellow metal, in turn higher gold prices.

Therefore, from a three months' perspective, spot gold prices (currently at $1,250 an ounce) in the international markets can go higher towards $1,300, while MCX gold prices (Rs 29,350 for 10 gm) can move higher towards Rs 30,200 for 10 gm. Depreciation in the rupee towards the 70-mark will be an added factor for price rise in domestic markets.

The author is Associate Director, Commodities & Currencies Business, Equity Research & Advisory, Angel Broking