When gold prices rally and bullish sentiments kick-off, the entire market gets into the bandwagon of new highs. We see analysts quoting new highs for gold. Some say $1600, some $1750 and there are some who also believe that it will cross $2000 by the end of 2019.
Well, there are many reasons that support the current and future rally in gold prices and justify the bullish sentiments.
2017 and 2018 were one of the worst-performing years for gold and many had even written off the yellow metal. Prices for the metal have moved between $1100 and $1300 an ounce for most of the last five years. But the lacklustre price movement is all over now.
Gold was being laughed at. But now, not many are laughing, as the spot price has broken out to six-year highs, and investors late to the party have been bidding up the top companies in the sector to 52-week highs. One thing is for sure: the gold trade is on, and it makes sense to add it to your portfolio now if you haven’t yet considered it.
But yes we cannot ignore the fact that it is becoming increasingly challenging for the market participants to anticipate and plan for the future. In this environment of rising uncertainty and falling opportunity costs of holding gold, the yellow metal stands out as a clean way to take a strategic position both for institutional investors as well as the official sector [meaning central banks]
The bullion bounce surge, which has taken off this month, will continue to be propelled by mounting investor worries.
Increased uncertainty across the globe will act as the catalyst for the recent and likely continued increase in the value of the yellow metal.
One more aspect that cannot be ignored is the Treasury yields. As Treasury yields continue to skydive, gold price levels could go through the roof as the scrambler for safe-haven assets continues amid the latest market volatility as trade wars between the U.S. and China rage on. This could provide more gains for gold-focused exchange-traded funds (ETFs) as analysts are predicting that the precious metal could shoot past the $2,000 per ounce price mark.
Where on one side there is so much happening in the US, on the other side we see China going equally active.
China has long been aiming to reduce its dependency on the US dollar. In an effort to reduce its exposure to gold it has been piling its reserves. For any country to diversify from the US dollar, it’s very important to purchase the yellow metal even in smaller quantities. This will help in meeting its objectives.
But China’s gold purchases, along with the buying spree in other countries, including Russia, also aim toward a broader geopolitical objective. They want to undermine dollar hegemony and reduce the United States’ ability to weaponize the dollar as a foreign policy tool.
As the Chinese buy gold, they have also been divesting themselves of US Treasury’s. China dumped Treasuries for the third straight month in May, pushing their holdings to the lowest level in two years. Data for June should be released in the next few days.
This move toward de-dollarization in China and other countries could boost the price of gold.
The recent increase in gold prices may be set to continue on the strength of a global push for de-dollarization.
Countries increasingly hostile to the US and dollar hegemony, such as Russia and China, are searching for alternatives to the dollar including gold.
China has severely restricted imports of gold since May in a move that could be aimed at curbing outflows of dollars and bolstering its Yuan currency as economic growth slows, Reuter’s reports.
The world’s second-largest economy has cut shipments by some 300-500 tons compared with last year – worth US$15-25 billion at current prices, the news agency said, citing bullion industry sources with direct knowledge of the matter who spoke on condition of anonymity because they are not authorized to speak to the media.
The restrictions come as an escalating trade confrontation with the United States has dragged China’s pace of growth to the slowest in nearly three decades and pressured the Yuan to its lowest since 2008.
A strongly heading trade war fuelled with a weak US economy will further push gold prices high.
Larry Kudlow, the American financial analyst said on Sunday that the US economy is heading for a recession. But he also mentioned that the recent US-China telephonic talks have produced positive news.
Last week’s desperation from Trump on China and for FED interest rate cut says it all. Summing it up, this time, China is taking an upper hand of trade talks, while the US will be on the receiving hand.
Monday, the 19th, we don’t have any data news coming in from the US and the markets are more or less reacting to the Hong King Protest news and an expectation of a stimulus from China.
All in all, Our Managing Director Prithviraj Kothari believes Gold is set to gain as recession, trade and geopolitical risks rise, and yields fall.
