After surging to a six-year high, spot gold in the international market corrected slightly. However, prices managed to stay above the psychological level of $1,500 an ounce and domestic prices will follow suit.
Gold prices spiked due to trade war worries, geopolitical tensions and expectations of policy easing by central banks’ amid the weak global economic outlook.
Prices have gained more than 25 percent in the domestic and international markets since the start of the year.
However, gold has recently corrected due to realistic policy measures taken by the central banks and nascent signs of easing trade war tensions which moderated the metal’s safe-haven demand. Higher-level of profit-taking assisted the sentiments as well.
Investors’ stayed away from fresh bets on gold after the recent Fed policy meet did not give a clear picture on the US central bank’s policy outlook.
As expected, the Fed’s two-day meeting concluded with a 25 basis point rate cut last week. However, it described the US economic outlook as favourable, which diminished chances of further rate cuts from the world’s largest economy. Cuts in interest rates usually support non-yielding assets such as gold.
This is the second time that the Fed reduced its interest rates this year. US economic growth has slowed down to 2 percent in the second quarter, which coupled with low job creation and low inflation prompted policymakers to cut rates.
The US also welcomed China’s decision to exempt some US goods from trade tariffs. Similarly, the US delayed its proposed tariffs on Chinese goods. This is considered a positive gesture from both sides ahead of the trade negotiations.
The trade war between the world’s top two economies has dragged for more than a year-and-a-half, straining the global economy. Amid forecasts of a weak global economic outlook, investors sought shelter in safe-haven assets like gold.
At the same time, the ongoing geopolitical tensions in the Middle East is likely to offer lower-level support for gold. The warlike situation between the US and Iran and attacks on Saudi Arabian oil fields by Houthi rebels are likely to push gold’s demand further.
Though prices have corrected down, investment interest for gold is still high with the holdings of the world’s largest gold ETF, the SPDR gold trust still placed at its recent highs. Meanwhile, long positions managed by money managers at COMEX platform declined to a one-month low level.
Looking ahead, the next round of US-China trade talks would be crucial for gold. Any hints of easing trade dispute would further weaken the yellow meal and vice versa.
Policy easing from central banks, especially from the US Fed and its impact on the dollar, would also be watched by investors.
In the domestic market, weak international prices coupled with moderate demand and strong Rupee weighed down the sentiments. Indian demand is reportedly lower as record-level prices deterred customers.
However, demand is likely to edge higher as the country enters the peak demand season. Gold demand is usually higher in India during September-December, due to higher wedding demand. Festivals such as Diwali and Dussehra also fall during these months.
On the price front, as long as prices stay above $1,462, we expect rallies to continue. A close below the same may show weakness which possibly takes prices towards $1,420 or more. The trend reversal point is seen at $1,365.
In the domestic market, a move to Rs 41,800 per 10 gram is still open but a recovering rupee is likely to weigh down the sentiment.