MCX gold futures rally 21% since last Dhanteras: Why investors should buy yellow metal this year

Representative image 

The year 2019 has been the year of bullion for the global commodity market as gold and silver prices staged a strong rally. A host of events that took across the globe such as extension and intensification of Sino-US trade war, geopolitical tension in the middle east, the US sanction of Iran, Nigeria, Venezuela, an extension of trade dispute of the US with European, Mexico, and India attracted investors towards gold.

Weakening of global economic condition as measured by GDP, inflation, labor market condition, trade balance, etc. also attracted increased investment into the bullion market in general and gold in particular. As a result, the CME gold prices surged by 21.70% since closing on Muhurat trading in 2018 i.e, on 7th November 2018 till 17th October 2019 while silver gained by 20.70% in the same period. In the domestic market, MCX gold futures gave a return of 20.92% since last year Muhurat trading day till October 17, 2019 and silver surged by 19.05%. The details are presented in the below table. 

 

7thNov 2018

17thOctober 2019

% Change

COMEX Gold ($/Oz.)

1226.2

1492.3

21.70%

COMEX Silver ($/Oz.)

14.5

17.5

20.70%

MCX Gold (INR/10 GRAMS)

31589

38196

20.92%

MCX Silver (INR/KG)

38257

45545

19.05%

Gold return

The International Monetary Fund has lowered the global economic outlook in its quarterly reports. In its April World Economic Outlook report, the International Monetary Fund lowered global growth forecast to 3.3% for 2019 from 3.6% in 2018 and for the year 2020, the projections was 3.6%. These projections were revised lowered by 0.1% to 3.2% for  2019 and 3.5% for 2020 from April 2019 forecast. The latest World Economic Outlook report released on October 15, 2019, growth projection for 2019 kept at 3.0% and for 2020 it is projected at 3.4%. Gloomy economic condition made the yellow metal as the best investment option among asset classes. 

On trade-related activity, the US and China kept on retaliating on each other by imposing additional tariffs on import of goods and services. There were several rounds of discussion at different levels including the meeting between US President Donald Trump and Chinese Premier Xi Jinping. However, both the sides failed to end the more than one and half year deadlock on trade dispute. Though there was temporary relief in the form of delay in imposition of additional tariff, agreement between both the countries on buying each other’s products and services did not really have major impact on the market. 

Since the economic condition was worsening, the central banks stepped in to bring the economy back onto the growth trajectory through easing monetary policies. At the beginning of the year 2019, the US Federal Reserve was on the course to keep its interest rates rising. However, the stance was changed in the second half of the year wherein it slashed interest rate by 25 basis points each in July and September 2019. This has resulted in a fall in the US treasury yield for 2-year and 10-year to multi-year lows thereby attracting investment flow into the bullion market. 

Since gold market in India follows the trend in the international market, the rally seen in the global market was reciprocated into the domestic market. The gold in international exchange rose to 6-years high in the year 2019 while on MCX, the prices rallied to all-time high thanks to the depreciation of Indian rupee against the US Dollar. Apart from this, another factor that led to rally in Indian gold was change of import duty on gold. During her maiden budget Finance Minister Smt Nirmala Sitharaman raised the import duty on gold and silver to 12.5% from 10% earlier. This rise in import duty sent shocking signals to India bullion market wherein the market participants were expecting cut in the import duty.  

Since the economic outlook is still looking bleak for major countries, which is prompting the central banks to step in to further ease the monetary policy. This will attract further buying in the gold and silver in the days to come. However, recovery in the global economic conditions, as well as the end of trade war between the US and China, may change the trend in gold and silver. 

Ravi Singh is a guest contributor. Views expressed are personal.

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