Subdued global sentiment favorable for investing in safe haven
The prolonged tariff war
The ongoing tariff war between US and China seem to be unending. However, given the recent developments, the trade talks between the two largest economies have shown a possible moderation in the tariff war; nevertheless, complete reversal is still far away.
The economic conflict between Japan and South Korea also favors investment into the yellow metal going ahead. Historically, trade wars have always had a negative effect on the growth of world economy, hence, IMF, has yet again cut down its global growth forecast to 3.0% (down from 3.3% from its earlier forecast in the spring) for this year and 3.4% (down from 3.3% from its earlier forecast). The revised outlook from IMF is weakest in 10 years, which is likely to be cheered by Gold bulls.
The availability of cheap credit has led to surge in housing price in many countries in the recent times. The soaring housing price backed by cheap credit is unsustainable in the long run. The impending crash in the housing market may have a ripple effect on the financial market. If we go into the history, subprime mortgage bubble, which was the major factor in 2007-08 financial crisis led to a multi-year rally in Gold.
Falling interest to support spike in Gold price
The Federal Reserve cut interest rates in September 2019 yet again after trimming it in July 2019 for the first time in more than a decade, with an intention to continue America’s record-long economic expansion by insulating the economy from mounting global risks. The widely expected quarter-point decrease was the Fed’s first, since it slashed rates to near zero in 2008. But unlike those cuts, which were intended to rescue a failing economy, Fed’s move was seen as a precautionary effort to protect the United States from slowing growth in China and in Europe.
The great China slowdown impact
The Chinese economy continues to grow at a slower pace as latest data shows China growth rate at 6% in the third quarter. China’s economy witnessed the weakest pace in 27 years due to trade war. China’s GDP has fallen sharply from 6.80% in the first quarter of 2018 after it tightened credit policy. In June, factory output and retail sales growth beat estimates, while investment in the first half of the year also gave further evidence that stimulus measures to curb the slowdown are feeding through.
Impact of financial crisis on gold
Global demand for the yellow metal has been rising continuously. According to the latest update, the demand for gold has increased by 8% yoy to 1,123 tonnes in second quarter of this calendar year on the back of demand from central banks.
SPDR Gold Trust Holding (in tonnes)
SPDR Gold Trust has increased its position from 800.20 tonnes (1st July 2019) to 920.54 tonnes (30th September 2019) within a span of three months, which is an increase of 15.04% over the period. This again confirms the bullish trend in the yellow metal.
Going technical: What do charts suggest about Gold?
MCX Gold price has given breakout of its almost 7-years Rectangle Channel pattern at Rs33,000 levels on the monthly chart. Gold price has given sharp rally from Rs33,000 to Rs39,885 in September 2019. MCX Gold has rallied almost 30% from its low of Rs30,683 made in October 2018 to touch an all-time high of Rs39,885 levels in September 2019. In addition, price has so far sustained above previous swing high of Rs. 35074.
Momentum indicator RSI has given positive crossover, which supports positive bias in the commodity. MACD has been sustaining above the zero line and currently is in bullish crossover as well on the monthly time frame. COMEX gold has taken support of its long term horizontal trend line from July 2019.
COMEX Gold price has given breakout of Cup and Handle pattern on the monthly chart, which is an indication of continuation in the price trend. On the monthly time frame, gold price has given a strong recovery from its immediate support zone placed around its 100-day exponential moving average. COMEX gold prices is trading above its Parabolic SAR on the weekly chart, which indicates positive momentum in medium term.
COMEX gold monthly chart
In the short term, Gold may remain sluggish on the back of progressive trade talks between US and China. The non-hard exit of UK from the European Union may also act as a headwind to the Gold price in the short term. However, the overall problem and weakness in the global economy is likely to persists. Geopolitical tension in the middle east is also likely to act as a price booster to Gold.
Rupee depreciation may be here to stay as dollar will be stronger in the short term, further, in our view, amidst global concerns, it is likely that WTI crude oil may not sustain below $50.
It is a well-known fact that gold serves as a hedge against currency and stock fluctuations, and makes a worthy part of your portfolio. Uncertainties in global markets coupled with geopolitical concerns have ensured that the yellow precious metal will shine despite the rate hike proposition in the US.
All in all, uncertainties in global markets coupled with geopolitical concerns have ensured that the yellow metal will shine bright in the time to come.