Gold prices shot up to its highest level in three years, in the aftermath of the Brexit referendum, on last Friday, as investors rushed to grab safer assets, leaving equities and other risk assets, which were already facing selling pressure.
Sluggish purchases
The prices of gold hit a three-year peak at around $1,355 per ounce on June 23, and hovering between $1310 and 1,320 per ounce in the international market currently. Earlier the highest price recorded was at around $1,900 per ounce in 2012 which moved down to $1,100 per ounce in the subsequent period, mostly attributed to the sluggish purchase by the central banks
“Later it recovered to US$1300 levels in the beginning of 2016 due to weak U.S. data. Last Friday it touched a three year high of around $1,355 per ounce on Brexit news. It is expected to go up to $1,400 per ounce in the coming days,” said James Jose, Secretary, Association of Gold Refineries and Mints, a national body for gold refiners.
On the previous day of the referendum in U.K., the gold price was at $1,265 per ounce and the Dollar index was at 93.87 and on Thursday, June 30, the Dollar index was at 95.75 and gold price was at 1315.65 per ounce. “As dollar strengthens, the price of gold is likely to rise,” said Hariprasad M.P. Senior Vice President and Head of Treasury and Banknotes, Centrum Direct Ltd.
Prices to rise
“Global commodities like Gold don’t overnight change the main trend. Gold is expected into a large sideways market having resistance at Rs 33500 - 34500 and at lower end Rs 25000 in the Indian market,” said Jimeet Modi, CEO, SAMCO Securities
The risk to reward ratio currently is not favourable for long trades. However in the short term there is possibility for higher levels but soon the gold price will try to catch up with the lower end of the trading band. However, to the extent of dollar appreciation the gold prices will rise in India, Mr. Modi added.
The disparity in the prices, he said, is due to conversion costs, which is more or less constant and will remain so. In fact the Indian price of gold is the derivative of international markets subject to currency adjustments. However Mr. Modi said during times of uncertainty gold has always found buyers. “But we believe such uncertainties don’t last forever, soon, the markets will discount the fact and move on. Therefore going with the crowd now may not be the wise thing in the gold market.”
In a statement issued last Friday, the World Gold Council (WGC) said that it expects to see strong and sustained inflows into the gold market driven by the staggering level of protracted uncertainty that investors are facing.
Small investors
WGC predicted that purchases of gold coins by small retail investors, which were already up sharply in the months running up to the vote (Brexit), should accelerate further. According to the world body, gold is a high quality and liquid asset and will provide investors with a hedge against market uncertainty, economic, political and intervention risk.
“The intermediate trend in Gold has turned positive from negative,” said Birendrakumar Singh, AVP , Systematix Shares & Stocks.
Upward trend
Time wise, he said, beginning from December 2015, the present upward trend would remain intact for a minimum time period of 6 months or it can even extend up to 18 months.
“Price wise the upward projection could be up to $1,509 or higher, it is the 61.8 per cent retracement level of the down trend,” Mr. Singh added.
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