All eyes on Fed Meet

Time and again, gold has been considered as a safe haven asset. In recent times, gold did deviate from this notion in March, as its prices fell following a crash in global stock markets.

This deviation underlines the uncertainty that gripped investors that month, with some gold owners presumably selling bullion to cover losses or to increase cash holdings.

But the past 3-4 months, have brought a significant  rally in gold prices. Though gold witnessed a few dips, but it managed to bounce back.

Last Friday, gold closed at $1,938 per ounce, up $14 for the week on excellent volume, considering it was a holiday week. During the trading week, gold showed excellent stability, closing the four days trading within a $20 range from high to low.

After reaching an all-time high of $2,070 on August 7th and seeing a selloff (profit taking) on August 12th, taking the price down to $1,870, we are now seeing base building. 

Last week gold had weakened over news of renewed vaccine. This hope triggered a strong DOW Fut at +285 and whole Asian markets mood lifted owing to that. The Oxford and Astrazencia vaccine trial resumed, but the number of patients across U.S, India, France and Brazil continued to rise. Some worrisome news came from France where initial talks of 1 week shut-down were under consideration. Moreover, Israel will also be doing it shortly. So, these are new dangers for the global post-Covid growth that is being factored by the markets. 

Gold rose to its highest in nearly two weeks on Tuesday, propelled by a softer dollar and expectation that the US Federal Reserve will reinforce its accommodative monetary policy.

Spot gold rose 0.6% to $1,968.94 per ounce on Tuesday, having earlier climbed to $1,971.71, its highest since Sept. 2. 

Once again gold was riding high over bullish sentiments. In the past five sessions, gold had four positive closes and it continued to rally on Tuesday morning. 

Gold (XAU/USD) built on Monday’s 1% rally after a steady start on Tuesday, reaching fresh nine-day highs at $1967. 

The main highlight in the past few days were-

• an improvement in the risk-sentiment

• courtesy of the vaccine hopes

• upbeat Chinese data 

• renewed US-Sino trade optimism

A good sign in the ongoing global crisis were the Chinese activity numbers that came in stronger than the estimates, suggesting the economic recovery is gathering steam. China’s industrial production in August was up 5.6%, year-on-year, and up 1.0% from July. Meantime, U.S. industrial production rose 0.4% in August from July, failing to meet expectations for a 1.0% rise in the period. However, July industrial production was revised up 0.5%, to a 3.5% rise from June. Also, news that China extended tariffs exemptions on some of the US good imports further fuelled the market optimism.

But markets were more focussed on the events lined up this week.

Gold futures on Tuesday headed higher and aimed for a second straight gain as investors awaited dovish statements from global central banks that are likely to support bullion buying in the midst of the global coronavirus pandemic.

There are going to be important policy decisions from major institutions- The Federal Reserve, Bank of England followed by Bank of Japan.

Bullion dealers across India and around the world as well as investors are expecting policy makers to promote a regime of low interest rates for a prolonged period to combat COVID-19, which could lift both gold and stocks further, commodity analysts forecast.

Given the current situation, central banks are expected to convey a dovish message to the markets which would further result on higher gold prices.

Prithviraj Kothari of RSBL suggests that market participants now await the U.S. Fed’s two-day policy event which ends on Wednesday, its first such meeting since Chairman Jerome Powell unveiled a policy shift towards greater tolerance of inflation, effectively pledging to keep interest rates low for longer.

Gold should be brought strategically

Gold has always been considered inversely proportional to other assets in its class- equity, debt, real estate etc. Amongst all these, gold has always given better returns during risk-off periods. The reason why gold enjoys a safe haven appeal is that it protects investors’ capital against tail risks and other events that have an adverse impact on capital or wealth.

During this pandemic too, gold has been seen performing significantly well across all asset classes. Precious metals prices continued their three-month long uptrend amid the COVID-19 pandemic. Demand for gold has been buoyed by safe-haven buying and global policy support in response to the pandemic. However, we saw gold fall sharply as the news of Russia discovering a vaccine came in.

The world is eagerly waiting for the discovery of a covid-19 vaccine in the hope that normalcy will return soon after. While experts say that it will definitely boost the economy, the impact may not be positive for all investment asset classes. For instance, gold, which has had a dream run this year, may correct, while equity might see a rally in the short term as it may have already factored in the vaccine discovery event. Experts believe that gold prices may correct post after a vaccine is approved.

Gold had a substantial run over the past one year and as no asset class can move in a straight line forever, gold prices are expected to correct as soon as an approved vaccine is discovered. However, the resurgence of patients in Europe is a brutal reminder that the pandemic is not over yet and that the second wave is only a couple of months away.

Prithviraj Kothari believes that such a second wave would be positive for gold prices. However, it should include the US as well, as the resurgence in cases limited to Europe could strengthen the greenback against the euro and gold, neutralizing the increased safe-haven demand for the yellow metal.

-If the second wave occurs, it should be bullish for gold not only because of the resulting economic slowdown and increased uncertainty but also because of the new stimulus programs that would probably be announced by both by the central banks and the governments.

And hence, sentiments for gold remain bullish. Following these sentiments, Smart investors are rightly buying gold, recognising it to be a hedge and/or a store of value during uncertainty. While demand for jewellery and physical gold has taken a hit, the focus is on the investment forms of gold. Even the central banks of the world, recognising the risk involved, are adding to their gold reserves. Gold, as you may know, plays an important role in central banks’ reserve management.

The top gold dealer in India opines given the on-going extreme turbulence in the equities, gold holds the potential to provide respectable returns.

Precious metals prices are expected to average 13% higher in 2020 relative to 2019 on expectations of strong demand due to heightened global uncertainty and ultra-low real interest rates. Upside risks to this outlook include a second COVID-19 wave causing a sharper-than-expected global slowdown. On the downside, a stronger U.S. dollar could push prices lower.

Particularly now when there is no imminent end to the Covid-19 pandemic, the spotlight will continue to remain on the precious metal.

Until the Covid-19 pandemic is contained and economic uncertainty prevails, the spotlight will continue to remain on gold. It makes good sense to buy gold strategically. The long-term secular uptrend exhibited by gold highlights the importance of owning gold in the portfolio with a longer investment horizon.