The pundits are all saying that the risks to the global economy are beginning to mount, be it in terms of trade wars, geopolitical uncertainty or the volatile oil market. In times of such uncertainty, gold prices have traditionally rallied since it is considered a safe haven asset.
Yet, contrary to expectations, gold prices have been dipping steadily over the past few weeks. In fact, the yellow metal extended falls to a one-year low in the global markets today. Spot gold fell 0.2 per cent at $1,223.56 an ounce this afternoon, after hitting its lowest point since last July at $1,220.41 an ounce earlier in the session. Yesterday, gold was down 0.32 per cent.
Similarly, domestic gold prices have slumped by nearly 2.7 per cent in the past two weeks, including the massive Rs 250 drop in prices yesterday. In the bargain, gold was trading at a five-month low of Rs 30,800 per 10 grams at the bullion market amid weakening global trend and considerable fall in demand from local jewellers.
In the national capital, gold of 99.9 per cent and 99.5 per cent purity plunged to Rs 30,800 and Rs 30,650 per 10 grams, respectively, a level last seen on February 8, 2018. This followed a drop of Rs 100 the previous day. Sovereign, however, remained unaltered at Rs 24,700 per piece of eight grams.
"Gold market is just following the US dollar; the dollar is strong so it's pushing the market down," said Ronald Leung, chief dealer at Lee Cheong Gold Dealers in Hong Kong, adding, "The economy is still good and interest rate still up, so that's good for the US dollar and negative for gold for the time being."
The greenback, which is near a three-week high, is holding firm against its peers following bullish comments from US Federal Reserve Chairman Jerome Powell earlier this week. According to him, the US was on course for years more of steady growth and he asserted the need for further interest rate hikes - at least two more hikes are expected this year. This is eroding gold's appeal. After all, rising interest rates lift the opportunity cost of holding non-yielding bullion - why hold gold when you can be paid to hold cash?
According to Kitco, a leading precious metals reference portal, the strong dollar was not the only factor weighing heavily on the precious metal's pricing. There was added pressure from the risk-on market sentiment amid recent gains in US equities. Furthermore, the current dispute between the US and its trading partners, including China and Europe, has been a negative for gold because it means rising import costs may drive up inflationary pressures.
Another key factor driving gold prices is Chinese demand, currently weak due to the trade war with the US, which has weakened the local currency and affected investor sentiment. "Investor appetite for gold is not very strong at the moment. I think that it is going to be trading sideways for a long time," Richard Xu, a fund manager at China's biggest gold exchange-traded fund, HuaAn Gold, told the agency. This matters because China was the world's largest consumer of gold bars and coins in 2017. "If China is slowing down, there will be consequences to global commodity consumption and that's going to drag gold down as well," he added.
So where are gold prices headed in the near term? According to experts a rally is unlikely anytime soon. "As far as mid-term trend in domestic gold prices is concerned, festive demand will start not before September. We may see a jump in physical demand for advance purchasing of jewellery in August since wedding season will kick-start post Diwali in November," Gaurav Katariya, research head commodities at Arihant Securities, told NDTV. He expects the price of gold to slide by a further Rs 300-500 towards a price tag of Rs 29,500 per 10 grams in next few days.
Silver prices are likely to continue moving in tandem. Silver prices dropped by Rs 620 to Rs 39,200 per kg yesterday on poor offtake by industrial units and coin makers. Globally, silver slipped to the weakest since July 2017. Silver coins, on the other side, were unaltered at Rs 74,000 for buying and Rs 75,000 for selling of 100 pieces in scattered deals.
(With agency inputs)