Is it right time to go bullish on bullion?
Geopolitical risks and uncertainty related to US President Donald Trump's ability to carry out his election pledges may drive gold prices towards $1,300 (Dh4,784) per ounce level in 2017, market strategists said.
However, they said, despite low inflation and weak dollar the resistance level of $1,300 is firm for now as expected US Fed rate hike and profit taking may keep gold from breaching the barrier this year.
Gold prices surge on August 9 amid rising tensions between the United States and North Korea after the North Korea responded to warnings from US President with a threat to strike the US territory of Guam.
Heightened geopolitical risks last week boosted demand for gold and other safe havens. Gold hit its highest since June 7 at $1,291.86 (Dh4,750) per ounce on Friday.
On August 8, stronger-than-expected US jobs data weighed on gold, dragging prices to the lowest since July 26 at $1,251.01 (Dh4,603) an ounce.
Spot gold on Monday edged down 0.2 per cent at $1,286.39 (Dh4,734) per ounce by 0657GMT, after marking its highest since June 7 at $1,291.86 an ounce in the previous session. Since August 9 gold has gained $40 (Dh147) per ounce, or 3.2 per cent.
In Dubai on Monday, gold prices of 24 carat soared by Dh4 per gramme to Dh155.75 from 151.75 on August 8.
"Gold has been gyrating between $1,200 and $1,300 for the past six months, as concerns about rising US interest rates have been off-set by a weaker dollar, geo-political risks and the uncertainty related to Trump's ability to govern and carry out his election pledges," Ole Hansen, head of Commodity Strategy at Saxo Bank, said.
"The early July rejection below $1,220 and subsequent recovery triggered a record two-week buying spree by funds. We believe that gold once again could be at risk of profit taking towards $1,240 but we view such a correction as a buying opportunity. Resistance at $1,300 looks firm for now and it will take a stock market correction/weaker US data and/or increased geo-risks to push it through," Hansen said.
However, Marie Own Thomsen, chief economist at Indosuez Wealth Management, said an important resistance level of $1,260 per ounce is already breached on recent geopolitical risk.
"Our target for the gold price is $1,300/oz. On the down-side, there is support around $1,200-1220/oz and any pullbacks towards this level would be buying opportunities in our view," she said.
Echoing the sentiments of Hansen, Meenakshi Gupta, assistant manager, Investment Research and Analytics at Aranca, said that the IMF's recent cut on US growth forecast should drive upward movement for gold in the medium-to-long term.
"We expect the gold price to remain range-bound between $1,230- $1,290 in the short-term, while may touch $1,400 in the long-term," Gupta told Khaleej Times.
Hansen said, in the short-term, gold is exposed to profit taking before eventually breaking resistance at $1,300 per ounce.
"The binary nature of the Korean crisis could either trigger a break above $1,295/oz and an extension towards $1,375/oz, the high from last June, while a potential easing of the tensions carries the risk of profit-taking, with $1,250/oz providing support ahead of $1,230/oz, the 200-day moving average."
How investors will react?
According to World Gold Council, bar and coin demand rose by 11 per cent year-on-year and India's demand for jewellery rose by 26 per cent. Moreover, gold held in European-listed ETFs reached an all-time high at 978 tonnes.
Thomsen said that the mine production of gold is almost stagnant and any significant rise in gold's appetite would also spike the gold prices.
"Investors and the markets also respond to supply and demand factors, naturally. Gold supply does not increase very significantly, and is in structural shortfall with respect to demand, the difference being made-up by recycling (mostly jewellery)," she said.
Avinash Kumar Singh, manager, Investment Research and Analytics at Aranca, said that gold is at a critical point, as it is attempting to break the 6-year of declining trend.
"US markets which are considered as a barometer for Worldwide Equity Markets are trading near a 52-week high. Since stock markets are considered as an important risk indicator, have been bullish in the year, gold could take a dip in short run as fear is moving away from equity markets. Investors should use caution as this signal may hint volatility in prices in the short-term, while we expect a rise in the long-run as uncertainty from Trump presidency may explore the metal prices," Singh said.
Explaining the market and investors reaction Hansen said that investors have been buying into weakness, potentially not because they were looking for a major gain on gold, but more to diversify and spread financial risk, amid concerns about the sustainability of the month-long stock market rally.
"Donald Trump in the White House has proved to support gold, given his unpredictability and sometimes irrational behaviour," he said.
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