Kishore Narne: Use corrections to buy gold

A key upside catalyst for gold could also come from increased political risks in the US, Europe

Gold has seen a good start to 2017, with prices gaining for two consecutive months as political risks from the US and Europe kept the demand for safe havens strong. The “reflation” trade slowed last month, as investors awaited more details about Donald Trump’s policies and its subsequent impact on the US Fed policies. The dollar, however, is maintaining its strength as three rate hikes by the Fed this year is a real possibility.
 
On the demand side, official demand in India recovered in February after slumping amid the surprise demonetisation move by the Indian government. India’s gold imports in February were up 82 per cent year-on-year at 50 tonnes. Investment demand is a key driver for gold and it has provided some encouraging signals. Global gold ETF holdings increased by about 55 tonnes in February after a small drop in January. SPDR’s gold holdings were up nearly five per cent in February. It will be important for prices to stay above $1,200 if investment demand has to sustain.
 
The short-term outlook for gold is mixed with prices likely to consolidate further in its recent range of $1,200-1,250. Several Fed officials in recent days have hinted at an upcoming rate hike which has led to the probability of a March rate hike jump to near 85 per cent. US economic data continue to be better with manufacturing activity near a 2.5-year high and PCE price index up 1.9 per cent year-on-year in January. While Trump provided few specifics in his address to Congress, he reiterated broad proposals for boosting spending and cutting taxes which led to a risk-on mood in global markets. Nonetheless, better risk sentiment globally is lifting equity markets and aiding broader dollar strength which will weigh on gold in the near term.
 
Over the medium to slightly longer term horizon, our bias favours a bullish scenario aided by rising inflation, political/geopolitical uncertainty and potential fizzling of the dollar rally. If inflation rises faster than expected, which is a real possibility, gold may benefit as real interest rates will fall. A key upside catalyst to gold could also come in the form of increased political risks in the US and Europe. While Trump’s policies remain unclear, Europe, too, could spring a few surprises this year. The Netherlands’ election is in March, the French election in April and German elections are due in October. This means that political uncertainty will continue to underpin prices throughout this year.
 
In terms of price, we believe that $1,180-1,150 on the Comex will provide a strong floor even if we see a correction in the short term and the upside could extend towards $1,320-1,350 in the first half of calendar year 2017 if the positive triggers play out. On the MCX, Rs 28,000-28,200 (per 10 g) is a very good support on the downside and positional traders should utilise corrections as a buying opportunity since the medium-term outlook is still positive. Key resistances are at Rs 29,900 followed by Rs 30,200.

The author is head of Commodities & Currencies, Motilal Oswal Commodities Broker