The World Gold Council (WGC) sees the current softening trend in international gold prices lasting only for months rather than years, a top official said.
In the short term, a reversal of much of the price weakness in the gold markets since June this year can be expected, John Reade, Chief Market Strategist, WGC, told
The weakness in international gold prices has nothing to do with the demand situation in the Indian gold market, which he said was expected to be quite ‘orderly and stable’ this year.
“I am not too negative on the prospects for gold,” said Reade, one of the pre-eminent gold analysts in the world.
Reade also made it clear that the price movements in gold had nothing to do with China’s imports or American coin buying or Germany’s investments.
Although the dollar price of gold had dropped by 5 per cent (averaging about $1,200 per ounce), the Indian gold price has gone up 8 per cent (mainly due to rupee depreciation).
“If you look at it from the point of view of the Indian consumer or the trader, the gradient has been 13 per cent,” said PR Somasundaram, Managing Director, WGC India.
Although India’s gold imports had fallen to 339 tonnes in the first six months this year as against 380 tonnes in the same period last year, the second half is expected to be better and take the overall level to 700-800 tonnes this year, according to Somasundaram.
Dual factors
Reade attributed the weakness in international gold prices to two factors — both emanating from the US. These two factors are an increase in real interest rates and reduction in the US Fed’s balance sheet, leading to strengthening of the US dollar.
The Trump administration’s short-term growth policies also helped the strengthening of the dollar this year, he noted.
The dollar strengthening and interest-rate hikes in the US are the two significant short-term drivers of gold prices. Of the two, the dollar is usually more important. “It is interesting that in the last 18 months, the dollar was not the most significant until about February-March this year”, Reade said.
He added that earlier real interest-rate changes and perceptions about long-term growth in the US were proving to be more important than the US dollar. “That’s now flipped back to a more normal relationship, where the strength of the US dollar is more important,” he said.
He added that the end of the period of dollar strengthening was closer rather than the beginning. He also felt the current trend of dollar strengthening could end abruptly.
Reade said that the US Fed had already gone in for two rate hikes and that the WGC has pencilled in two more before the end of this year. He doesn’t expect the gold market to be overly affected by US interest rate hike decisions. “It seems clear that the Fed is going to hike at every alternate meeting until there are signs of stress upon the real economy,” he said.
Reade said that the WGC is looking at the main drivers of gold prices and was doing lot of work to isolate short- and long-term drivers of gold prices to see what actually changes the gold prices.
The finding is that the short term driver of gold is always “macroeconomic” conditions and parameters, while in the long run it is the fundamentals of the markets that decide gold prices, according to Reade.
“We will soon be publishing to show the attribution of returns in gold and what their drivers are,” he said.
By ‘fundamentals’ of the market, Reade said that he meant people who buy gold for jewellery or for investment and generally hold onto it for a decent length of time. “For the short term, the fundamentals of markets don't really matter,” he said.