Gold prices likely to remain firm amid weak growth, soft rates

In India, a sharp fall in the equity market amid a slowing economy, subdued corporate earnings and an overall risk-averse sentiment have seen investors flock to the yellow metal

The ongoing trade war between the United States (US) and China, possibility of rate cuts by the US Federal Reserve (US Fed), long-standing nuclear issues with Iran, uncertainty regarding Brexit amid slowing global growth has pushed gold prices nearly 17 per cent higher in the international market on a year-to-date (YTD) basis to $1,503 per ounce.

Despite the run, analysts see more headroom, as risk aversion is on the rise in financial markets following the latest developments regarding US-China trade talks, luring safe-haven seekers back into gold.

"We believe yet another escalation of the trade tensions is likely, which should weigh on the global growth outlook and add to prevailing uncertainties. While we now see further upside for gold even in the short term, as reflected in our three-month target of $1,575 per ounce, we acknowledge that its safe-haven benefits come at a price following the recent rally. The consensus is turning more and more bullish. While price targets are being upped, they are not excessive yet, which we would assess as a warning sign," says Carsten Menke, head of research at Julius Baer.

Back home, a sharp fall in the equity market amid a slowing economy, subdued corporate earnings and an overall risk-averse sentiment has seen investors flock to the yellow metal as a safe-haven alternative in an uncertain environment. This has fuelled near 18 per cent YTD rise in gold prices in the domestic market.

So, what’s making analysts bullish on gold now?

Over the past few years – in 2016, 2017 and 2018 – gold prices have averaged $1,203, $1,257 and $1,269, respectively, according to reports.   

Typically, gold prices move up in phases of very low interest rates and conversely move down when rates move up. Currency, markets also play their role, as a stronger dollar makes it more expensive to buy gold in other currencies and lowers demand. That apart, geopolitical stability is another factor that drives demand and prices.

"There are some market participants who still view the present rally with caution and would like to see how the US-Iran and US-China relations evolve, as this will have a bearing on the price of gold. But for sure, the slower growth in the US and a weaker dollar with low interest rates would be the fundamentals to watch out for," says Madan Sabnavis, chief economist at CARE Ratings.

As regards rates, experts see the US Fed cutting rates two or three times before the end of the calendar year 2019 (CY19). And while statements by board members, including Chairman Powell, are signalling a wait-and-see approach, the market has barely changed its forecast, they suggest. This, in turn, should support gold demand and prices over the next few months.

"The US Fed is not alone. The European Central Bank's (ECB's) President Draghi recently announced that they are ready to extend bond purchases or cut rates to sustain economic growth. The Bank of Japan (BOJ) is also expected to make policy more accommodative. And emerging market central banks are likely to follow suit. The prospect of lower interest rates should support gold investment demand," wrote Alistair Hewitt, director of market intelligence at World Gold Council, in a recent co-authored report with John Reade, their chief market strategist.