AFTER A DREAM RUN IN 2019, GOLD PRICES LIKELY TO PAUSE FOR BREATH

In December 2019, the US Federal Reserve Bank announced new term operations totalling $365 billion (over the two months upto January 2020), which involves ramping up the amount of temporary liquidity injections into the overnight lending markets. The Fed is to offer a total of $490 billion in liquidity via repo operations, including the $75 billion that it has already pumped in through three earlier term actions.

- Shri V.P.Nandakumar MD & CEO Manappuram Finance Ltd

For all the scientific and technological progress the world has made, people continue to value gold for the feeling of safety and security that it provides. Even today, most retail buyers of gold would trust it more than the currencies of their home countries. In fact, 75% of retail investors in India trust gold more than the rupee1. In the last calendar year, the price of gold in India has risen 23.9%2 against a backdrop of falling interest rates, economic uncertainty and geopolitical tensions. The international price of gold went up by 18.9%. Typically, a bull market in gold develops during times of global currency crises, a bull market in bonds (i.e.falling interest rates), a commodities bull market, or a combination of all three.

The weak growth outlook for global economies has helped boost gold prices. Also, the reduction in interest rates effected by the US Federal Reserve and other advanced economies, and gold purchases by central banks in the emerging market economies, have also helped support gold prices. Recently, the Asian Development Bank lowered the growth forecast for China and other major Asian economies including India. Notably, China and India are among the two largest consumers of gold in the world.

At the same time, recent reports suggest that the ongoing US vs. China trade war may ease somewhat as the US has approved the phase -one of the trade deal, which could reduce the uncertainty around global trade policies. The US has reportedly agreed to halve the tariffs on products worth $110 billion from 15% to 7.5%. Should this lead to optimism and a fresh wave of global risk-on trade, it can potentially weigh down on traditional safe-haven assets, including gold. However, sensitive issues such as indirect state subsidies, intellectual property and the Chinese ambition to dominate tech markets remain unresolved. Further, the upcoming 2020 presidential election is another uncertainty factor impacting policy risk.