Gold is seen as a preferred asset for all types of investors, even central banks.
The price of gold rose by one per cent on Monday in the international market, while the rise was a limited one in India.
Globally, gold has become the favoured asset class after the British vote ('Brexit') to leave the European Union and the ensuing uncertainties; the British currency, the pound, is now at a 30-year low.
Gold is seen as a preferred asset for all types of investors, even central banks.
An S&P Platts' analysis says the environment is now favouring a “lower interest rate environment, on the back of elevated economic and financial market uncertainty”, resulting in a “more fundamental and sustainable positive impact on gold as uncertainty in financial markets is expected to only increase in the months ahead, gold prices could benefit strongly in the medium term”.
Institutional investors’ gold buying has increased, as reflected in the rise in holding in SPDR, the world’s largest gold exchange-traded fund.
On Friday, the net addition in that fund was 18.5 tonnes to a total of 934.3 tonnes.
At the start of June, this was 868 tonnes, largely believed to be bought by European and British institutions, ahead of the referendum.
The SPDR holding was 630 tonnes only six months earlier, when the US Federal Reserve raised rates for the first time in a decade.
Now, says the World Gold Council, “Pension funds could start buying gold, a class not traditionally investing in gold,” as a portfolio diversifier.
As the pound is one of the few reserve currencies, it said, central banks’ buying of more gold is very likely, to hedge their currency risk.
The share prices of gold mining companies have also been rising, as the value of their gold stocks, mined or not, have also risen.
Prices are now well above their gross cost of production and so, they are unlikely to be in a hurry to sell gold for liquidity.
Added a trader, on condition of anonymity: “When (global) gold prices were $1,200 (an ounce) and above, many of them (mining firms) had started hedging their future production in forward markets. Which means the gold they were to mine at future dates were sold by them in advance. Now, prices are quite above that level and a feeling will start that they would have been better off had they not have hedged. This could result in de-hedging or buying back their forward sales, which will further push up gold prices.”
The technical levels, however, have to turn favourable. Surendra Mehta, secretary, India Bullion and Jewellers Association, said: “Gold needs to test the $1,260 level before it goes up beyond $1,332. There will be heavy selling beyond $1,332 with poor demand in Asian countries like India, it can't sustain a level beyond $1,360 on speculative buying.”
In India, however, gold was quoted at a discount to the price of $55 an ounce or Rs 1,150 per 10g, as local demand is absent.
This will result in higher arbitrage, by buying of spot gold and selling on the commodity exchange, and gold demand for exports that could be round tripping in nature.
Prices here are expected to firm up once rain spreads and hopes emerge of better agricultural crops, resulting in higher rural income. And, the onset of the festive season.
