By Mr.
Prithviraj Kothari, MD, RSBL
Before jumping onto the
main topic, I would like to essay out some facts about Gold prices this year.
(Assuming Silver prices have more or less followed Gold prices). I am sure; lot
of people would be feeling that US$60 is a big decline for Gold prices in the
recent weeks and few would even have increased their bearish bets against the
precious metal. I must warn them by quoting that even after the recent decline;
the precious metal is nearly 16% up from its lows.
Then why there is a
decline?
1. The U.S. central
bank surprised markets last week by cutting its rate hike projections more than
expected, down from four to two in 2016, citing the potential impact from
weaker global growth and financial market turmoil on the U.S. economy. This led
to a rally in the U.S. dollar index and in turn bearish for the metal.
2. There was a brief
safe haven status which Gold gained due to the attacks in Brussels.
3. Throughout the
last week various Fed members including Patrick Harker, the Philadelphia Fed
president, have come out in support of
raising interest as soon as April – if the economic conditions were to move.
4. One more reason
is the Easter Holidays, where I would see the profit booking in the Gold prices
is quite understandable.
Now coming to the main
topic: Why Gold is undervalued according to me?
1.
Reducing the
number of rate hikes from 4 to 2, clearly states that FED isn’t sure how the
world economy would fare in the longer run. Even when US economy has been
showing some positive economic numbers, they are unable to take the most
obvious step and when the inflation picks up faster than the central bank
expects, they would have to increase the rates quickly.
2.
A dovish Federal
Reserve, a weaker U.S. dollar and negative real interest rates will all be
positive for gold this year. Over the recent years, the most dominant driver
for gold prices has been the direction of the US dollar. As we are now
expecting a lower dollar over the coming years we expect it to play a crucial
role in the movement of gold prices. As for the Fed the analysts say that even
if the Fed does raise interest rates later this year -- a scenario they see as
unlikely -- they will be perceived as being behind the inflation curve high
will once again be a pushing factor for gold prices as investors will likely
buy gold because of lower US real yields and as some may see gold as a possible
inflation hedge.
3.
There are lot of
crucial political events this year:
a. Current
leadership crises in Brazil
b.
US presidential
election in November
c.
U.K’s June vote
over its membership in European Union.
All of them would leave a lasting effect if they go
against the market.
4.
Terror threat
across Europe, Syrian conflict and other Geopolitical tensions will always make
Gold has the safest investment during the turmoil.
5.
Moody’s Investors
Service highlighted China’s surging debt burden in lowering the nation’s
credit-rating outlook to negative from stable earlier this month.
6.
We are in a tug
of war between slow growth and high valuations on one side and central bank
stimulus on the other.
Looking at the renewed turmoil
in financial markets by highlighting the Fed’s policy divergence with the
ultra-easy stances of the ECB and Bank of Japan, the near future seems bright
for gold.
Thank You!
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The primary purpose of this article by Mr. Prithviraj Kothari is to educate the masses of the current happenings in the Bullion world.
- Previous blog -
"Brussels explosion and Gold's Safe haven appeal: RSBL"
http://riddisiddhibullionsltd.blogspot.in/2016/03/brussels-explosion-and-golds-safe-haven.html
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