The price of gold has crossed the $1400 mark which is significant as it has taken place after six years. The last time the price of gold was past this mark was 29 August 2013 after which it was a gradual descent. For 2016, 2017 and 2018 the price has averaged $1203, $1257 and $1269, respectively. However in 2019 there has been an upward movement with the average daily price now being just over $1300, says a research report.
According to the note from CARE Ratings, the rally in gold price now appears to be in progress as large volumes of currency across the world is being channelled to the exchange-traded funds. This has been furthered by a more volatile political situation where investors are rushing to gold as a safe harbour, it added.
"Gold price will be largely driven by perceptions which in turn affect demand for the metal. The August Gold futures contract was at $1410 on 26 June 2019. The December contract was at $1420 while the June 2020 was at $1439. As the present pressures do not seem to be ebbing, the market is not ruling out a further upward movement in the range of $1450 in the next few months which can be the next testing point," the ratings agency says.
During 2018, gold price had tended to also decline which was assumed to be the new normal for the metal. In fact, the price had breached the psychological mark of $1,200 per ounce mark in August. This was attributed to the growing strength of the dollar as the two variables are inversely related.
According to CARE Ratings, a stronger dollar means that the price of gold in other currencies becomes dearer thus impacting demand. However, it says, things have changed of late with the price crossing the $1400 mark and promises to head upwards given the underlying conditions.
The price of gold had actually declined post the elections in 2016 as the US President had indicated that there would be expansionary policies that would in turn lead to inflation which would necessitate higher interest rates. Gold in this situation becomes less attractive as the dollar would also tend to strengthen.
Gold gains in phases of very low interest rates and conversely loses when rate move up, CARE Ratings says, adding, the currency markets hence plays its role as a stronger dollar makes it more expensive to buy gold in other currencies and lowers demand. Last geo-political instability is also responsible for gold price movements as any level of uncertainty makes gold more alluring as a safe investment.
According to the ratings agency, escalation in the US-China trade war, political and economic tension in the Middle East and uncertainty of the course of Brexit are factors responsible for the rally in gold prices.
"The G-20 summit this weekend would be of interest as the US and China would be having talks to possibly sort out the trade issues which have been instrumental in the eruption of the trade war between these two nations.
The near six year high of $1,402 witnessed on 24th June was supported by the dovish tone of the major central banks including Federal Reserve and European Central Bank (ECB). The indication that the US Fed would be lowering rates this year adds to the sentiment that the dollar is expected to weaken which in turn means an upside impetus for gold. The 10-year treasury is already at less than 2%. Investors are taking long positions on the exchanges and there is also a rise in physical demand for the metal," CARE Ratings concluded.
