Gold prices back in limelight after mild correction
Spot gold tested a new lifetime high last week due to a combination of factors that have converged to propel the demand for the yellow metal. Multiple catalysts like US rate cut speculation, China’s economic stimulus, and renewed geopolitical tensions attributed to the rise in prices.
Prices on the London spot market surged near to the psychological level of $2500 an ounce, gaining almost 17 percent so far this year. Domestic prices also gained momentum with the key MCX futures prices surpassing Rs 74000 per ten grams.
The recent economic release from the US has fuelled optimism that the US Federal Reserve might cut interest rates two times this year. However, the latest Federal Reserve meeting minutes indicated apprehension from policymakers about inflation and rate cut expectations are postponed.
A cut in interest rates will cause lower yield for dollar-denominated assets which can lead to a decline in the value of the US dollar.
Rising geopolitical tensions in the Middle East and heightened tensions between Russia and Ukraine also bolstered the safe-haven demand for the commodity. The recent Gaza conflict has caused significant tensions in the Middle East, especially since the hostility between Israel and Iran is at its highest. Last week, Russia announced it has started tactical nuclear weapons exercises near Ukraine further escalating tensions in the West. Geopolitical tensions play a crucial role in shaping market sentiment and influencing the price of gold. As a tangible asset that holds intrinsic value, gold often becomes a preferred investment during times of uncertainty, driving its price upwards. Expectations of a moderate global growth forecast insisted investors rely on gold. The global GDP growth is projected at 3.1%, little changed in 2024 from the 3.1% in 2023. There are estimations of a decline in developed economies like Germany, Japan, and the UK this year. In addition, persistent worries over China’s economy forced investors to buy gold as a hedge against inflation. A weak global economy drives investors toward gold as a reliable store of value and a hedge against inflation, currency depreciation, and economic uncertainty. This increased demand for gold during economic downturns results in higher gold prices.
The recent 1 trillion-yuan economic stimulus package from China to boost its sluggish economy also assists global gold prices. Stimulus measures can influence inflation expectations, industrial demand, currency values, and global economic sentiment which plays a significant role in shaping the demand and price dynamics of gold.
Besides, the central banks are the key demand driver of gold in recent times. As per World Gold Council data, central banks have accelerated gold purchases to above 1000 tonnes per year in 2022 and 2023. In the face of seemingly challenging conditions like higher yields and US dollar strength, there are forecasts that the central bank’s appetite for gold would continue this year as well.
The broad bullish outlook remains intact due to healthy fundamentals, but intermittent corrections can be seen. Weakness in the US dollar, US rate cut speculation, escalating geopolitical tensions, worries over the global economic outlook, and high central bank purchases would be the positive triggers for the commodity. Meanwhile, firm global equities and any changes in the Fed’s policy decisions would cause a downturn in prices later.
(The author is Head of Commodities, Geojit Financial Services)