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Global gold demand to surge

15 July 2019


Global gold demand is predicted to get a major fillip with the financial market uncertainty and accommodative US monetary policy fuelling a surge in investment demand for the yellow metal over the next six to 12 months, the World Gold Council (WGC) said.As gold prices look poised to test the 2019 high of $1,439 following the semi-annual testimony by Fed chairman Jerome Powell in front of the US Congress last week signalling the case for a more accommodative monetary policy, the WGC said in its latest mid-year Gold Outlook Report that price momentum and positioning may fuel rallies and create pullbacks, "as investors continuously reassess their expectations based on new information".


"In particular, central bank policy is likely to play a significant role. Aside from the 247 tonnes of gold purchased directly by central banks through May, market expectation that the US Federal Reserve will cut interest rates two or three times later this year is also a factor," the WGC said.A cut in interest rates would fuel both the ongoing stock market rally and low bond returns - both factors which make gold more attractive. Gold already became one of the best-performing assets by the end of June, and gold-backed exchange traded funds have captured $5 billion.Precious metal analysts said gold prices may continue to benefit from the current environment amid the threat of a policy error, and the price of bullion may exhibit a more bullish behaviour over the remainder of the year as market participants look for an alternative to fiat currencies.


David Song, precious metals and currency analyst at DailyFX, said as Powell set the stage for an interest rate cut at the end of the month, gold prices reclaimed the psychological $1,400 level as the dollar dropped."As such, with central bank easing on the way from both the Fed and ECB, global bond yields continue to head lower, sparking a record number of global bonds yielding negative rates, thus the opportunity cost for holding gold is reduced. Alongside this, the backdrop of slowing global growth has also underpinned the precious metal, thus, risks remain tilted to the upside with the double top in sight at $1,435-1,340.""The prospect of lower interest rates should support gold investment demand," said the council. "Alternative high-quality, liquid assets such as gold may help investors balance risks more effectively, while providing uncorrelated long-term returns."


The WGC noted that in the event of an economic downturn, central banks would not be able to reduce interest rates much further (as they are already so low), meaning that more quantitative easing would be required, and possibly other measures that have not been tried before. That might also drive investors to gold.The WGC said although weak economic growth and the possible impact of higher gold price volatility may result in softer consumer demand this year, especially in emerging markets that make up the lion share of annual demand, broad structural reforms in India and China will likely support long-term gold demand, according to the council. It also expects central bank gold demand to remain positive.


"In addition, we estimate that the recent announcement of a 2.5 per cent increase to gold's import duty by the Indian Ministry of Finance may result in a reduction to 2019 demand of approx. 2.4 per cent. And that, if the higher levy were to become permanent, it could reduce long-term Indian consumer demand by slightly less than one per cent per year," The WGC said."As we look forward to the rest of the year, we believe that consumer demand may be soft and speculative activity could amplify price movements but, overall, it is likely that investment demand will remain robust and central banks will continue their net purchasing trend," it said.



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