Mumbai, October 25: With the beginning of five days of festival of lights Thursday, the optimism with respect to firming up of gold prices in the domestic market is also picking up. However, besides sentiments, there are several other reasons for the gold prices to rise. These includes US-China trade war stress, delayed Brexit solutions, Geo-political tensions and slow down in Global growth. All these factors augur well for the gold prices in the international market and as its subsequent effect in the domestic market signals firm trend during the next 12 months, analysts said.
The precious metal has proved to be one of the best asset class in the current calendar year of 2019 till date as prices have risen by 15 per cent in the domestic market, getting some support from weakness in the domestic currency Indian Rupee. The Rupee has fallen by 1.4 per cent against the US dollar. Since the last Diwali (November 7, 2018), gold has outperformed across major asset classes and this year return has been to the tune of 21 per cent, with equities giving a return of 9 per cent.
Gold prices have showed strong signs from the beginning of this year following a lot of distress related to trade war between US and China, geopolitical tensions and Brexit related uncertainty. A lot of these factors led institutions like IMF, OECD and World Bank to trim their global growth forecast not only for this year, but for the coming year as well. Central banks across the globe also turned dovish since the start of the year adding further gains for gold.
Domestic Gold demand has remained subdued for previous festivals, where Dussehra sales were 20 per cent lower than the previous year and at the same time higher prices could dent the overall demand in Diwali as well. Elevated prices and hike in import duty by 2.5 per cent also took a hit on gold imports that were down 12 per cent in 2019. Gold imports for 2019 have been to the tune of ~565 tonnes until September compared to ~644 tonnes in the same period last year.
Kishore Narne, Head- Commodities & Currency, Motilal Oswal Financial Services Limited (MOFSL) in a note to its clients said, “We are of the view that slowdown in major economies, as predicted by global agancies like IMF, World Bank and others could push central banks to remain dovish for an extended period and that could continue to support gold prices”.
Dr. Joseph Thomas, Head of Research, Emkay Wealth Management said, “Returns from gold comes from sudden upward movements during specific time periods. If you look at the last five years gold returns have been around 7 per cent CAGR. At the same time, equity returns for the same period has been anything from 12-15 per cent and returns have been in the range of 8 -10 per cent from fixed income, for the same period”.
Jateen Trivedi, Senior Research Analyst (Commodity & Currency) at LKP Securities said, “Gold recently has given investors some respite to enter as prices have corrected by Rs 2,000 and now floating near Rs 38,000 from last month’s high of Rs 39,850. With Diwali less than a week away it looks likely; investors shall get ample time to buy the gold in this range of Rs 38,000 levels as the metal looks steady”.
Higher bullion prices however, is a point of concern for the domestic market, but with a fair monsoon and festive season approaching it will be important to see the movement in gold prices. India has also added gold to its reserves and with a dovish outlook on the economy, gold could continue to outperform, Narne said.
Internationally Gold has recently stayed in a tight range of $1,475-$1,500 as investors await greater clarity on both Brexit and the US-China trade talks. In Domestic markets INR has been strengthening after steep low of 72.60 last month and now below 71.00. This shall keep domestic prices floating near Rs 38,000. “We believe that this correction gives a good opportunity to enter as overall prices look bullish after Diwali for potential upside towards Rs 39,000 in near term" Trivedi said.
Therefore, to reap returns from gold, one needs to position ahead of the uptick, and move out as it peaks out. This is exactly why a low portfolio allocation is suggested for this asset class, said Dr Joseph. If the Rupee remains weaker from here and if the current gold price levels in international markets are sustained, then domestic gold prices will remain well supported even at the current levels, he added.
Narne said, ease off in trade war could lead to some correction in prices, but until Rs 35,500 is held, we remain bullish and expect gold prices to move higher to test previous highs of Rs 39,500 followed by Rs 41,500 over the next 12 months.