Uncertainty is good for gold and there is certainly going to be more of it.
Investment demand could strengthen further as a result of the upcoming US presidential election, with expectations of a Brexit result being reflected in Donald Trump's candidacy. The Brexit rally added to what has already been a stellar 2016 for bullion, with prices up 25% after three years of losses.
Hedge funds have boosted their bets on gains in the metal to an all-time high. And if there are any further market shakeups, gold will continue to be a hedge investment for anyone looking to get out of the dollar, and out of equities.
Jewellery demand in China and India, the world's biggest consumers of the precious metal, has been lacklustre this year. Offsetting that has been increased demand from gold-backed exchange traded funds this year, which have seen inflows rise more than 30 per cent to 53.3m ounces - their highest level since 2013.
The US Federal Reserve has also become more cautious on further interest rate increases. Before the UK's Brexit vote, central bankers had been sounding the alarm that an exit from the European Union could be disruptive to the global economy. US Federal Reserve Chair Janet Yellen cited Brexit "consequences" as among the factors that went into the decision to keep interest rates unchanged at a policy meeting this month. Higher interest rates lift the appeal of holding dollars and increases the cost of holding the zero-yield instrument Gold. That also means a stronger dollar cuts the worth of holding non-yielding gold that's priced in this denomination. Lower interest rates tend to have an opposite effect.
For all the volatility the Brexit vote has triggered, gold faces its own headwinds. A stronger dollar is certainly one of them. We have seen in the past that dollar was a better safe-haven compared to other assets. Gold's history to sustain post any crisis could however cause doubts on its sustainability as a safe-haven.
Veteran Investor Jim Rogers expressed his doubts recently on gold as a safe haven relative to the dollar. However, our own view is that , the difference now is that investors and the common man in the UK and elsewhere in Europe are afraid that the banking system could come under pressure and a Greece like situation cannot be ruled out, where banks stop functioning and ATMs shut till normalcy returns.
In situations like these, it does not matter if the money is in pounds, euros or dollars. There is no guarantee for the safety of the money lying in the bank. This is where gold as a physical asset comes in very handy, and as we know it is a popular currency of exchange and a lot more easier to exchange than the dollar.
Only gold will stand tall during the turmoil. And over the long term, it's the only safeguard against fiat currency depreciation. Sustained gains for gold are based upon currency debasement and not on Brexit concerns alone.
There's speculation surrounding a rate cut in the UK, and the European Central Bank could even try moving rates even further into negative territory. Lower interest rates for longer is what we continue to expect. The global economy is going to face lower growth prospects and rates are therefore going to be kept lower for longer.
The uncertainty of Britain pulling out of the EU is not over yet, but, it has just begun. So there's still going to be some potentially good upside for gold. However, what happens in other markets, including equities and currencies, will impact gold's outlook more directly.
Investors remain confident the precious metal will keep rising as the UK hammers out the details of its withdrawal from the EU. The twists and turns of that process should keep the bulls in action.
In the domestic market, prices are expected to maintain the positive bias seen in the international markets. MCX Gold futures active month contract, is expected to move in a range of 30500-33500 in the coming months barring any major appreciation in the Rupee.
Gnanasekar Thiagarajan is a Director at Commtrendz Research and a consultant to commodity bourses and corporations both in India and the overseas. He has more than 20 years of experience in commodity and forex trading and was formerly a forex dealer with the Bank of Nova Scotia.
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