Gold is shining bright and how. Prices of the yellow metal hit a new high of over Rs 76,000 per 10 gram on the MCX (Multi Commodity Exchange) on Wednesday, tracking gains in the global market. Overseas, gold hit $2,665 an ounce on Wednesday, eclipsing its previous high of around $2,648 an ounce it had scaled a day earlier.
So far this year, the precious metal has gained 30 per cent in dollar terms. In India, prices are up around 19 per cent in 2024. What's driving this huge rally?
There are three key reasons. The US Federal Reserve recently slashed its key interest rate by an aggressive 50 basis points and it is expected that there will be another 50 bps cut through the remainder of calendar year 2024, followed by more cuts in 2025. Typically, gold and interest rates have an inverse relation. So, when interest rates fall, gold prices go up.
Lower interest rates make gold more attractive and thus drives demand. Also, gold is considered a safe haven asset. When there is economic uncertainty also gold gains currency. Apart from Fed, other major central banks around the world have started to or are expected to start slashing their interest rates as inflation cools and economic uncertainties rise. The Reserve Bank of India is also expected to start cutting rates in the October-December quarter.
Heightened geopolitical tensions are driving economic uncertainties up. While the Ukraine-Russia conflict shows no signs of an end, Israel stepping up its attack on Hezbollah in Lebanon has raised possibilities of an all-out war in the Middle East.
In the US, a weak labour market in recent months has driven up probability of a recession. The Fed's outsized rate cut, was in a way, a preemptive measure to ensure the US economy remains in good shape.
"The prices of gold continue to remain elevated, primarily driven by the rally following a 50-basis point rate cut by the Federal Reserve. Continued geopolitical risks, led by the escalation between Israel and Lebanon in the Middle Eastern region, have also contributed to the upward trend," said Chintan Mehta, CEO Abans Holdings.
Another factor weighing on gold is China. In the beginning of 2024, Chinese investors and consumers were buying gold in a big way, amid slowdown in other areas like real estate, which in turn were fuelling the price of gold. The Peoples Bank of China too has been a major buyer of gold. The Chinese central bank announced another interest rate cut this week amid a weakening economy.
"China has been aggressively accumulating gold at various price points since $2,200," noted Sandip Raichura, CEO - retail broking and distribution and director, Prabhudas Lilladher.
Back home, the gold price surge comes at a time the festive season has just kicked off with Onam in south, Ganesh Chaturthi in west and Durga Pooja to follow soon in the east. That will keep gold in demand.
"The sentiment is upbeat as the festive season has already begun. However, presently due to Shradh period, the demand may witness some softness but is expected to gain momentum at the onset of Navratri till Dhanteras," said Colin Shah, MD of Kama Jewellery.
Market watchers expect prices to remain elevated in coming months.
"With expectations of continued Fed rate cuts over the next couple of quarters—including a 50 basis point cut anticipated for the November meeting—the US dollar is likely to remain weak, which historically supports gold prices," Raichura pointed.
According to Shah, gold prices managing to cross the critical resistance level of $2,630 indicates a strong support towards $3,000 levels in the medium to long-term.
Raichura too feels gold could touch $2,700 in the near future, with long-term projection of around $2,900.
Domestically, gold could cross Rs 78,000 per ten gram, felt Shah. Mehta of Abans too sees gold rallying to Rs 77,000 and then possibly extending higher, looking ahead.
