Hold tight: Trade wars will put gold back into investors' portfolio

Religare Broking

Gold continues to lose its glitter as the smart money seems to be evading the safe haven assets. Gold prices have shaved off almost 6 percent on a yearly basis in international markets, plunging to one-year lows.

Even amidst the trade conflict saga between the US and China, which has been at the centre-stage of the market, the asset has failed to garner buying interest.

To understand the dynamics behind the depreciating value of gold, we need to take cognizance of the attributing factors that define the flow of money in this asset.

It is the strength in dollar, upbeat outlook of the US economy and rising rates in the US which are acting as headwinds for gold in the current scenario.

Gold is usually seen as the store of value during times of uncertainty by the investors. But, this time around, all of the safe haven demand has been moving to the dollar, where it is seen stealing the show with gains of close to 8% from its 2018 lows of 88.25 tested in February 2018.

Even as the global economic landscape looks edgy with the ongoing trade turmoil between the US and its allies especially China, the outlook of the US economy is still robust.

Earlier this month, both the US and China exchanged their first volley of attack on each other by imposing tariffs on $34billion worth of each other’s goods.

The news did lift gold prices somewhat, but they could not sustain and plunged lower, even breaching the crucial support zone of $1235-1240 an ounce.

President Trump’s aggressive push to his protectionist policy is strengthening the dollar index while thrashing gold lower due to its negative correlation with the same.

Further pressurizing the gold have been comments from the US Fed chairman Jerome Powell in his first testimony earlier this week. He reaffirmed expectations for two more interest rate hikes this year boosting the dollar.

Monetary tightening by the US, in particular, tends to impact gold negatively as rising rates lift the opportunity cost of holding non-interest bearing asset gold and boost the dollar, in which it is priced.

The steep drop witnessed in gold prices of late indicates they are still pinned in a downtrend. At the time of writing, spot gold is trading at $1223 an ounce (Rs.29780 per 10gms at MCX), and trading well below the support turned resistance of $1240 an ounce.

There seems to be some more pain for gold bulls as prices look to inch further on the downwards trajectory towards the key cushion area of $1206-1205 an ounce (Rs.29400-450 per 10gms at MCX) in coming days.

However, the only ray of hope for the yellow metal draws from the recent comments by President Trump. He has pronounced his displeasure about the monetary tightening stance of the US Fed, prompting some long unwinding in the dollar. This may work as a catalyst for reviving gold from the oversold territory.

So some more room for correction, but the way Trump is ready to impose further tariffs on Chinese goods and even EU is planning to retaliate against US actions, some allure should come back to gold. It may not be too long before gold finds itself back in investors’ kitty …gleaming and shining!!