Gold enters long-term bull market but analysts urge short-term caution

Gold prices seem to have entered a long-term bull phase, having increased by 11.5 per cent in just a month, in one of the fastest rises seen in recent times. The spike has taken the metal to its highest in six years in the international market. 

In India, prices have hit an all-time high, with a mammoth 12 per cent rally, the highest month increase since March 2016. Due to this, the demand for new gold has tapered, while the sale of old metal and jewellery has reached a peak. Analysts, however, advise caution in the short term.

The rally reminds one of the bull run of last decade, when gold went up nine times from 2001 levels, to trade above $1,900 in 2011. However the subsequent fall brought the yellow metal down by almost half, with support at $1,000 levels.

This time the rally has been combination of factors such as the European Central Bank’s (ECB) unexpected move to turn more dovish than the consensus, followed by a similar move by the US Fed, and Iran's shooting down of an unmanned US drone.

Noted US-based analyst Nigam Arora, who has also authored the Arora report, said, “For the short-term, RSI on both daily and weekly charts is overbought. This indicates a high probability of a pullback in the short-term if the news flow stops being supportive. However, overbought markets can easily become more overbought if there is further good news.”

Market experts now eye the crucial meeting between US President Trump and Chinese President Xi Jinping coming Saturday, when leaders of the G-20 economies congregate in Osaka on June 28-29.

Arora said, “If the two sides strike a good long-term deal (to put an end to trade war), there is a big chance gold will fall by as much as $100 in a short period of time. On the other hand, if the acrimony between the two sides worsens drastically and Trump goes ahead with additional tariffs, gold moving by as much as $200 over a period of a few days cannot be ruled out.” For the short term he has advised caution.

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The wild movement is likely because over long period, gold has moved in a narrow range of 50-60 dollar and at higher levels short positions were built. Short sellers have been trapped in this rally and have been forced to cover positions, giving further push to prices. However, if there is any soothing report indicating subsiding tension, short sellers may go aggressive and sell even more.

Kishore Narne, Head-of Commodities & Currencies, MOFSL, has advised caution in the short term. He said, “We advise caution in short term as the sharp rally could see some corrections, but investors can look to buy on dips. Gold has underperformed to other financial assets over 3-4 years and has been catching up for a year now. We believe the momentum in gold prices would continue to push higher, with potential targets of Rs 36,000/10 gm by the year end seeming quite possible. The potential target in rupee terms for 2020 is as high as Rs 40,000–45, 000 per 10 gm.”

Globally even institutional investors have turned bullish. They buy in exchange-traded funds and the largest gold ETF, SPDR, which saw a spurt of 8.5 per cent the past one month, holds 802 tonnes currently.

Technically, according to Arora, “The gold chart shows a bottoming pattern followed by a breakout. This is highly bullish for the long term. Also bullish is the fact that the breakout occurred on good volumes on both daily and weekly charts.”

Echoing similar views, London-based Metal Focus has also turned very bullish, but is cautious in the short term. Philip Newman, director, Metal Focus, today said, “There is considerable room for investor positioning (long positions) to start to grow further later this year, when we believe conditions will begin to turn decisively more supportive of a higher gold price. In particular, as the US economy loses momentum (the impact of the 2018 tax cuts fade and the trade wars start to bite), this will feed through into a sharper drop in equities. Elsewhere, many of the tail-risks that have been in place in recent years, that might encourage defensive investments, still remain relevant. These in turn should encourage a pronounced jump in safe haven demand, for a range of assets including precious metals. As such, we expect gold to set new highs before year-end, with these gains extending into 2020.”