Why gold will continue to glitter

The US Federal Reserve’s rate rise is the only concern; price in rupee terms will remain elevated

The season is setting in for buying gold. For those looking to do so, experts suggest they act at every fall.

The price of gold in India seems to have bottomed out.

Some even say there are several factors that could take gold higher.

Gold has provided negative returns for the past two years in India. In 2015, too, the price of gold is lower than in end-December 2014.

Never in the past two decades has gold fallen for three consecutive years, and veterans say if it does, it will be highly unusual. But, this alone cannot be the reason to believe the trend for gold will turn bullish.

The dollar is expected to remain firm, weakening the Indian currency and consequently pushing up the domestic price of gold.

Also, India's demand for gold is rising to earlier levels.

“Gold in rupee terms is likely to resume its uptrend.

"The upside momentum is restrained by a strengthening rupee but if the rupee finds a bottom near 64.2, expect gold to rise towards Rs 27,200 per 10 gm by Diwali.

"Gold in dollar terms should find support from physical demand from India and China,” says Sudheesh Nambiath, senior precious metals analyst, South Asia & UAE, GFMS Thomson Reuters.

Domestic gold is hovering around Rs 26,500. Nambiath believes prices will continue to rise in coming years.

Globally, crude oil has fallen sharply, which means no worries over inflation, while the dollar is strengthening and equities are also doing well.

However, gold has still not fallen much in the last two years because the market still factors in some growth concerns, according to Ajay Kedia, director, Kedia Commodities.

China is slowing, the European Union and Japan are not growing and the International Monetary Fund has said the world growth rate will be lower than expected. Whenever there are growth concerns, gold is preferred in such countries.

Higher gold demand in China is a result of this.

Certain key ratios also point to favourable conditions for gold. The gold to crude oil price ratio is 21.44, the highest since 1998.

The high ratio indicates oil is not doing well, highlighting economic growth concerns.

The copper to gold ratio also indicates growth worries.

CLSA’s chief strategist, Christopher Wood, has turned bullish on gold.

CLSA has started buying gold mining companies’ shares. In the latest Greed & Fear report, Wood explains gold is insurance against increasingly reckless monetary policies.

There is a flip side. Natixis Commodities highlights in its latest report, "The price of gold will continue to be heavily influenced by the Fed's interest rate decisions.

"Indeed, the expected path of interest rate hikes will be the main driver behind the price of gold.

"Bearing in mind this relatively pessimistic view of demand for gold, we see gold averaging $990/oz. For 2017, we expect gold prices could average $1,020/oz."

In the Indian context, a rise in interest rates in the US would mean a stronger dollar, which will push up domestic gold prices.

Having said that, Natixis also warns of being too bearish on gold.

It says if economic conditions in Europe deteriorate to an extent that it spurs local demand for gold or if tensions between Russia and the West return, or there is conflict in the Middle East or in Eastern Europe, gold will go up further.

In that case, “We see gold prices averaging $1,300/oz in 2016 and $1,400/oz in 2017”.