Concerns over US-China trade war, a slowdown in global economic activity and buying from central bank augurs well for the yellow metal. Gold prices are likely to touch $1,350 in the medium term
For the past few sessions, there has been a small rally in the metal and energy prices. In normal circumstance, this upswing could be construed as a revival in demand and improvement in economic sentiment.
Given the current state of the world economy, one must have their risk assessment hats firmly placed on their heads. The markets at large have been reacting to events rather than fundamentals.
Big geo-political events, unfortunately, have been recurring with a regular periodicity, thus, ratcheting up the volatility factor.
In the last few weeks we have seen large events like unraveling of the Brexit, reopening of the US administration (although temporary), slow progress in US-China trade talks, US Fed’s dovish stand, Venezuela crisis and practically all central bankers throwing caution to the winds, as far as economic growth numbers go.
While events can dictate prices in the short term, one will have to be careful while creating long-term bets, as those need to factor in fundamentals of supply and demand. Current markets are better suited for short-term plays with strict stop-losses.
In the current scenario, gold seems to be the commodity of choice from a long-term perspective. From a short-term event perspective as well as long-term supply demand perspective, gold seems to be in a great position for a stellar run.
Concern over US slowdown and rising expenditure augurs well for the yellow metal. Last week, US Fed Chairman Jerome Powell said case for a rate increase has "weakened", with neither rising inflation or financial stability considered a risk, and "cross-currents" including slowing growth overseas and the self-inflicted wound of a government shutdown making the US outlook less certain.
Powell added that the central bank may end up with a larger balance sheet than anticipated.
Second, the markets are also waiting to see the outcome of the US-China trade negotiations. Despite comments from US President Donald Trump that he would soon meet Chinese President Xi Jinping to seal a trade deal, Washington reiterated its March 1, 2019 "hard deadline" for an agreement to avoid implementing higher tariffs on a host of Chinese goods.
Disappointing factory activity data across much of the globe also has fuelled concerns about a slowing economy. All of which builds a rather strong case for gold as an investment.
This sentiment is further bolstered by the fact that throughout 2018, global central banks supported bullion demand in a significant fashion.
A multi-decade high in central bank buying (close to 651.5 MT) drove demand growth. Central bank gold purchases were the second-highest on record last year as central banks in India, Russia and Turkey, among others, added to their existing gold reserves.
Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, hit their highest level since June 2018, confirming the allure for Gold investments.
Technically, gold may see some correction after a smart rally, but the marginal fall in prices should be taken as an opportunity to create positions. The gold prices seem well on track to see levels of $1,350 on midium-term basis.
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