Gold seen shining more as world worries over dollar, oil and U.S. rate cut


Photo by Ramiro Mendes on Unsplash

If you had followed our Akshaya Tritiya advice to buy gold, you would have certainly been richer today.

Spot gold prices are up by around 3% since then, but even if you missed the run then it may not be too late to buy. The stars are lining up for a further rally, perhaps stronger than stocks.

While the Indian stock market has soared to all-time highs, riding on Prime Minister Narendra Modi’s re-election, expectations are that international gold prices will climb solidly to $1,400/ Troy ounce by the year-end from current levels of around $1,330.

Indian prices are bound to follow, as nearly all gold is imported into the country.

What is likely to drive gold’s rally?

For many months, gold’s upward movement remained relatively subdued largely due to the strength of the dollar, which historically trades opposite in value to the yellow metal. But the bets are that dollar has probably peaked and it’s likely to decline in coming months.

The trigger for dollar’s fall is expected to come from the US Federal Reserve with many executives, including its Chairman Jerome Powell, already hinting that rate cuts are likely to counter the economic damage from a prolonged trade conflict with China.

With US President Donald Trump seemingly hellbent on more such strong trade action against other countries in the run up to his 2020 re-election bid, the pressure on the dollar is unlikely to ease. 

A pullback in the dollar would free up gold at a time a number of political events that should drive up its safe haven demand. 

War-like clouds have appeared in the Straits of Hormuz between the US, Iran, Saudi Arabia well as other Middle East neighbours; a troubled Brexit is creating tensions in Europe; civil war in Libya and Venezuela, as well as the increasingly messy trade conflict between US and China.

Global central banks including Russia, China and India have been on a record-breaking spree of gold purchases since last one year and are not showing any signs of letting up.

The World Gold Council thinks that this is probably because the central banks want to hedge their bets by diversifying away from the dollar into gold.

It’s not surprising as gold has historically been considered a store of value and served as a currency down the ages.

And with the trade conflict between two of the world’s largest economies, US and China, escalating, bankers are expecting top gold consumer China to further shore up its gold purchases. It is expected to happen as increasing gold reserves strengthens China’s case to offer the yuan as an alternative currency to the dollar internationally.

Even in a worst case scenario for an investor, therefore, all it would mean is a slightly longer wait for gold to climb strongly further from current levels. So how can you go wrong with a bet on gold ?

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