Can Gold Prices Revive Its Mojo Again?

After losing around 10 percent in 2015, gold’s lure as an asset class is back in action as the metal has risen by around 5.37 percent in 2016 till date, while MCX gold has risen by around 6.63 percent in the same time frame.

The rise in price is on account of rise in investment demand in the recent months. Investors poured $926 million into ETFs backed by precious metals so far in January. Holdings in global gold ETPs reached almost 1,500 metric tons last week. That’s the highest since November.

The inflation hedge appeal for the yellow metal has revived again as the recent strength in oil prices reviving back from 12 year lows in which WTI and Brent crude both gained by more than 20 percent has also been the reason for strength in gold prices. Besides, China's economic slowdown and financial mayhem are fostering a cycle of decline and panic across much of the world which in turn is turning the investor’s interest towards the yellow metal.

The policy actions by the European Central Bank has also left the mark on investors that the promise by Draghi to do whatever it takes in order to propel growth in the Euro area. The European Central Bank (ECB) president Mario Draghi has reassured investors that it is ready to take action if falling oil prices and slow growth in China hurt the economy.

The monetary stimulus programme has been kept at around 1.5 trillion Euros, however, the targeted rate of inflation of around 2 percent is a cause of concern which opens the door for the ECB to consider and review its policy measures in its March meeting. Any possible action by the ECB to broaden its monetary base is an indication that the Euro Area needs a broader push from the central bank to bring back growth in track.

In terms of speculative positioning for the commodity, fund managers and hedge funds have been consistently reducing their short positions in the commodity and turning in to net longs. As on 1st Dec’ 2015, fund managers were net shorts at 17949 contracts and they have turned in to net longs at 21915 contracts for the week ending 26th Jan’2016 indicating rise in speculative interest in the commodity.

On the other hand, the investment demand seem to have been in action again as the gold holdings in the SPDR gold trust have gained by around 26.86 tonnes to 669.23 tonnes as on 29th Jan 2016 indicating an increase of around 4.18 percent in the year to date basis.

In the recent FOMC meeting, the U.S. Federal Reserve said it was "closely monitoring" global economic and financial developments, and held interest rates steady as expected. The central bank removed a previous reference from its statement to the risks of the economic outlook being balanced and said it was weighing how the global economy and financial markets could affect the outlook. Also, Physical gold demand in Asia has been slowed in the recent week, curbing seasonal buying in China ahead of a big holiday, which is scheduled from Feb’6’2016 and resume on 14th Feb’2016.

The way forward

The global economy finished last year on a fragile footing, with factory activity in China shrinking for the 10th month running in December, while euro zone manufacturing picked up but U.S. activity slowed. Possibility of increasing geo-political tensions between Saudi Arabia and Iran, consistent slowdown in Chinese growth rate, revival of speculative and investment demand, and mayhem in the Euro area are all the push factors for gold prices to rise in the near term.

Bullion has benefited from the risk-averse sentiment that has dragged equities and oil to multi-year lows and pushed investors towards assets considered a safe store of value. While, any strong influx of data from the US will make a case for stronger dollar and the gradual rate hike a good possibility, bargain hunting at lower levels and consistent trading above psychological hurdle of $1100 makes the price move in the yellow metal to rise higher towards $1160 mark (Spot gold CMP: $1120/oz) from a three month perspective. In the Indian markets, gold prices (CMP: Rs.26800/10gms) may move higher towards Rs.27500 mark in the same time frame.