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Are Gold Prices set to Peak?

G. Chandrashekhar, Commodities Market Specialist

 

April has been a good month for gold prices and by implication for gold bulls; but the market may be peaking soon if one went by leading indicators.

 

Over the last several weeks, three factors helped the yellow metal move up from low to mid-$ 1200 levels to test $ 1300 an ounce; but that psychological barrier was not breached decisively. Robust demand, geopolitical developments and monetary policy expectations all combined to propel international gold price higher.

 

Recent US macro-economic data seemed to suggest that the possibility of the US Federal Reserve hiking interest rates in June this year was waning. This meant deferred liquidity tightening - a good recipe for a move higher in gold rates.

 

From a geopolitical perspective, Syria and North Korea hogged the headlines, setting off alarm bells of emerging instability in security situation and pushing investors into the safe-haven territory. Gold benefited despite a healthy equity market.

 

The demand side was another booster. Both India and China – two of world’s largest importers and consumers – have enhanced their import volumes since the beginning of the year. In India, the market has put the trauma of demonetization behind and business seems to be picking up, albeit steadily in the wake of the ongoing marriage season that will last till May. The recent strength in the rupee has also helped contain the potential for price spike. The New Year demand in China also helped.

 

The relationship between gold and US treasury yields is well known. Treasury yields have fallen significantly over the past month which has also lent strength to gold.      

 

Now, there is reason to believe, some of the drivers may change course. Again, from the demand side, in India, June - September period is when the rural population is busy with agriculture-related activities and physically demand is seasonally low. Whether physical demand will improve after the harvest season in September will depend on the southwest monsoon, its temporal and spatial distribution, impact on farm output and rural incomes.

 

As for US monetary policy, there has been a slight turnaround in expectation. Some of the indicators suggest that the low growth rate of Q1 will give way to a rebound in the following quarters which, going forward, can potentially encourage the Fed to examine the interest rate policy more closely. Additionally, the chances of a stimulus package from the US administration are also said to be waning.

 

There is also belief that the drop in the US nominal yields is coming to an end. If realized, gold could face price correction. There are also some imponderables. Will President Trump succeed in raising the growth rate to the higher target of 4 percent and will he be able to spend $ One trillion on infrastructure as promised? No one knows. But if Trump succeeds, it would be negative for gold prices.

 

Last but not the least, gold mining costs are falling and new investments made in recent years are about to begin to show results in terms of higher production. In other words, supplies are expected to be augmented. 

 

In sum, notwithstanding the ongoing tug-of-war between bull and bear factors, the probability of a correction in gold price from the current levels is rated high. The metal could first decline to $ 1250/oz and then move closer to $ 1200/oz in the weeks ahead.

 

Disclaimer: Views are personal and not the views of the publisher.