Spot gold rose to a near-all-time high in the first week of May. Multiple catalysts like the weak US dollar, the US debt ceiling standoff, and global economic fears pushed prices higher. Tracking overseas sentiment, spot and futures prices in the domestic market hit a historic high.
Predictions of a pause in US interest rates followed by the recent banking sector catastrophe and signs of easing inflation, prompted investors to flock to safe-haven assets like gold.
Investors shifted focus from the dollar, which is also considered as a safe haven, to gold-like assets due to a drop in the outlook of global interest rates. As gold earns no interest payments or other cash flows, it historically has a negative correlation to interest rates.
The US dollar corrected more than 11 percent from a twenty-year high it hit last September. As gold prices are dollar-denominated, a weak US currency tends to drive gold prices higher.
The recent banking crisis and worries of an impending recession also rooted investments in assets perceived as safe. In April, two top US banks, both catering largely to the tech sector, collapsed. The crisis in Swiss banking giant, Credit Suisse was also reported in the same period. There is speculation that this banking crisis is poised to turn into a full-blown financial meltdown.
There is a long-standing relationship between the economic crisis and the price of gold. Currently, investors are wary of taking bets on risky assets due to the banking crisis and fears of a recession. This has increased the investment demand for gold.
Meanwhile, investors are looking at uncertainties surrounding the debt ceiling talks. The unexpected banking crisis led to the tightening of the credit market, which may also help to cool down the US economy and inflation. Easing worries over economic uncertainties are likely to dent major rallies in assets that are considered safe during economic distress. The present supply-demand dynamics boosted the outlook of gold. As per World Gold Council data, gold demand increased by 18 percent in 2022. Demand from the jewelry sector, increased purchases by central banks across the world and higher industrial consumption also assisted the metal to surge higher.
In the domestic market, prices rallied to a fresh record high. MCX June futures recorded a fresh high of Rs 61845 per ten grams in the first week of May. Prices advanced more than 11 percent so far since January 2023 and the gains were about 21 percent in the last twelve-month period. Domestic gold prices almost doubled in the last five years, making the commodity an attractive investment among Indian households.
The short-term outlook of the metal remains on the positive side, but there are chances of a correction. There is a stiff resistance seen at $2070-75, which if broken, would trigger another round of bullish rallies which may take prices to new historic highs. However, easing global economic tensions may cause a price correction, but major liquidation is highly unlikely due to firm fundamentals. Anyhow, the downside turnaround point is seen at $1800 an ounce.
(The author is Head of Commodities at Geojit Financial Services)
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