After equity crash is it time to stock up on Gold?

Last Updated: Thu, Feb 08, 2018 13:37 hrs
FILE PHOTO: An employee of Deutsche Bundesbank tests a gold bar with an ultrasonic appliance during a news conference in Frankfurt

​The recent equity-dump has sparked a craze among traditional, mostly commodities such as Gold, Silver, and Copper. Gold is quoting price of Rs 31600.428​,​ up by as much as 1.2% in Delhi markets. 

In a market where equities are being dumped, Gold certainly is regaining lost ground and turning out to be a​n asset​ to consider​. ​

​Gold makes sense for investors in an international market, where

  • The ​US ​Fed​ ​ha​s​ already signaled about probable interest hikes
  • Dow Jones Industrial average has already slumped by margins of over 4%, and ​looks to contract further
  • Long term bonds are the only ones making a marginal improvement.
  • The fall of the The Dow Jones industrial average has ripped off major exchanges of $4 trillion. Apparently, Warren Buffett too lost a sizable chunk in the carnage.
  • Domestic markets such as BSE and NSE have coughed ​up ​points owing to the brouhaha on the 10% LTCG tax and DDT tax​ and global cues​.
  • ​This fear is the booster that could ​lead Gold to a fresh peak, as high as a range of $1450-$1650 from the current levels of $1340. ​​

    ​A 2017 JP Morgan report ​ predicted a similar bullish outlook on Gold, but said it could occur in the second half of 2018. The report said the spot-price could flare as much as $1340 in the second half of the year. It factored the US economic growth, and the Fed's decision on reviving interest hikes for a significant change in bullion. The report also mentioned potential for Silver to trade significantly higher than Gold, since Silver had a historical tendency to outperform during out-sized rallies.

    Gnana Thiagarajan, Director Commtrendz Research, and a regular columnist with Sify.com suggested that Gold could flare right upto $1650 an ounce, and that the current $1375 resistance could be broken. His peers however are modest about Gold's estimated jump.

    • Hareesh V, Commodities Research Head at Geojit, a commodity brokerage house, said Gold at $1370 levels could be an interesting buy
    • Richard Xu, a fund manager at China's biggest Gold exchange-traded fund too shared that the near-term target of $1400 per ounce was more realistic, after ​d​ollar sank to a fresh three year low on January 23rd.
    ​​Is US-market' behavior leading to Gold-jump?​​ ​​

    ​The immediate factors that have an impact on Gold are US interest rates, valuation of the greenback, and trade concerns. There are other ​​factors such as demand-​s​upply, and geopolitical concerns ​​too. Other concerns such as the current dipping trend in equities, too is a factor to consider. By the way, the current equities trend has sagged the Dollar's strength too. ​​

    ​Trump's anti-globalisation measures too have supported the decline of the US currency. 

    For instance, the latest import tariffs (import duties on refrigerators), have directly ​seen ​currencies, mainly ​the Chinese Renminbi​ (RMB)​, Euro and the INR gaining. The RMB has so far managed to add nearly 3.5% against the dollar, while the INR has been gaining in the past 30 days. ​

    ​On Wednesday, news appeared about a US trade deficit, which ballooned to 12.6% in the current fiscal. This ​is the big​gest​ ​drop ​since 2008, and sparks fears of increased protectionism. There is also a probability that President Trump could ​strategise about ​devaluing the dollar in order to adjust the trade deficit. ​This was his election rhetoric that spooked global markets.

    ​Although the US has had numerous ​trade deficits​,​ they haven​'​t ha much impact the valuation of Gold overall, but the weaker dollar narrative does push Gold to newer highs. For evidence, ​the gold spot​ ​price is already up by 0.10 points, post the announcement on US​ ​trade ​deficit​ and is expected to rise through the remainder of the week.


    W​hen IT ends in India, IT ​begins in China ​

    ​Speak of Gold, and one certainly cannot ignore the gar​ga​n​tuan demand from Asian economies​ ​- especially China and India. The individual countries usually track the ​bullion and jewellery prices, but during their festive seasons, the price of Gold is reflective of the demand of these two countries. 

    The buying season in China and India, two big buyers of Gold, is timed next to each other. The Wedding season in India ends ​and opens into the Chinese New Year, a time when buying begins in China. ​

    ​By the way, the Chinese New Year begins on 16th February 2018. ​​

    ​​What does this mean for Jewellery Buyers​​ ​​

    ​The ​​World Gold Council in its report has stated that demand for the yellow metal registered a 4% year-on-year growth to 189.6 tonnes, a number higher in nearly 17 years. ​​

    ​Data from Sify.com's analysis suggests price of 22 Karat Gold in Chennai was up by 3% or Rs 860 (from Rs 28250 to Rs 29110) in the past one month. Price of 24 Karats ​g​old too increased by 3.04% or Rs 919.79, from Rs 30213.9 to Rs 31133.69, in the past one month. ​​

    ​In Mumbai, the price difference for 24 Karat was highest, a 3.58% or Rs 1040 jump, (from Rs 28970 to Rs 30010). The jump in 24 Karat prices was a similar 3.58% or Rs 1112.3 (from Rs 30983.96 to Rs 32096.26). The price has increased significantly and there is expectation that this momentum could rise.  ​

    L​earn​ings​ from the Past ​​

    ​A similar bullish trend had engulfed the markets, when Gold systematically was reaching newer targets​ over six years ago. ​​At one point, on Sunday, September 5th 2011, Gold peaked to an all-time high of $1900 levels. Market analysts back then commented that Gold would peak to $2000. Some of the predictions​ from analysts, back then​, are as follows:

    • If you have gold, stay invested, increase its share in the total portfolio to 10-15 per cent, as this is the time to buy gold, though gradually,' Rajesh Iyer, head - ​ products and research, Kotak Wealth Management.
    • 'The key factors that will determine support levels of the gold market is whether exchange-traded products' holdings remain relatively stable and physical demand responds to much lower prices. In the longer term, gold still possesses structural pillars of support in an environment of negative real interest rates and rising inflationary pressures, as well as continued central bank buying. We remain positive on gold prices for 2012, holding an annual average forecast of $2,000/oz,' said Sudakshina Unnikrishnan, vice-president, Commodities Research, Barclays Capital.
    • Gold demand to increase: According to the World Gold Council, 'the estimated gold bullion holdings by the end of 2010 accounted for just one percent of total assets under management globally. This means there is still scope to invest in the yellow metal.'
    • Wise-heads and traders​: who did not subscribe to the Gold-rally back then averred against holding Gold. No brownie points for guessing the top names in this list. Warren Buffett, the billionaire equity investor and Doctor Doom were prominent skeptics. ​Buffett who has steered clear of cryptocurrencies, had held similar thoughts about physical gold too. Noubel Roubini, or 'Doctor Doom', who the current millenial generation remembers for his anti-bitcoin comments​,​ had predicted the doom on gold.
    • Nouriel Roubini said, 'So gold remains John Maynard Keynes’ “barbarous relic,” with no intrinsic value and used mainly as a hedge against mostly irrational fear and panic. Yes, all investors should have a very modest share of gold in their portfolios as a hedge against extreme tail risks. But other real assets can provide a similar hedge, and those tail risks—while not eliminated—are certainly lower today than at the peak of the global financial crisis.
    Immediately after setting a fresh high on September 5 2011, Gold prices tumbled. So much so that they have been dismissed for nearly five years as a dead investment, offering little to meager returns. Buffett, in fact questioned Gold's ability to return dividends. But then Gold traders can always retort that Gold can be moulded into jewellery, as against paper-investments that Buffett lost from the equity-slump.

    And Mr. Buffett, what does one do with equity-investments that have turned heap? Origami or Bon-Fire?


    An upcoming bulls market

    The macro-economic factors and candle-charts are pointing towards the cycle of 2011 repeating a Gold-rally again. Here is a Chart (Courtesy: TradingView) which shows why a sizable Gold rally looks ominous. ​The chart details:

    • Peak of $1920.94 set on 1st September 2011. ​​
    • From September 2011 to June 2013, there has been a continual slippage. ($1190 range). ​​
    • Period of Volatility: Build-up observed on Jan 2016, with price moving from $1060.75 to $1254.85 within a month, but then price is back to levels of $1120. ​​
    • Trade in 2017: The support is around $1200 levels, but by October a new level of $1320 develops. The peak so far is $1366, set on the 25th of ​​January 2018.
    • Gold price is already testing support levels of $1323.20. ​
    The factor of a sagging equity market, a dipping US currency, coupled with a soaring demand from China and India are all pointing to a new Gold rush. The Chinese New Year is on 16th February, just ​ two days after Valentines Day, and there is hope for this Gold Bull to rise. ​And, any improvement in spot-prices should auto-reflect in domestic prices too.

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