Categories: Business

Trump speech reins in gold prices

Gold prices that have been steadily moving up since January this year took a downward beat on Wednesday as global investors gained confidence from the moderation in US President Donald Trump’s speech wherein Trump also announced an ambitious developmental spending to revive the prospects of US economy. After gaining over 9.5% since January this year, the prices of the yellow metal came down by over 1% on Tuesday as Trump’s administration tries to thin down the uncertainties unleashed (earlier) by its “America First” rhetoric. Usually, gold price takes a beating when the economy does better. The strengthening of the US economy means that there is a very strong case for Fed’s rate hike now and going further this means that “the trade of safety (buying of gold) would become less attractive than the trade of risk”, says Shekhar Bhandari, Senior Executive VP & Business Head – Global Transaction Banking & Precious Metals at Kotak Mahindra Bank. The Fed’s hike would strengthen the dollar while correspondingly weakening the currencies of all gold importing countries, thus making gold import costlier for them.

“Barring the near term, gold prices should start moving gradually upwards in 2017,” feels Quantum AMC as “the world is in great disequilibrium, both with respect to the global economy as well as geopolitics.”

Besides the potential currency war between the US and China, the concern of political events, especially the French elections, could trigger gold’s appeal if right wing thought sweeps elections there. Such an outcome might facilitate gold’s ascent due to weakening of the Euro against the US Dollar. “But Europe’s consumption demand for gold compares nowhere to the combined consumption of the lustrous metal by China and India,” says Abnish Kumar Sudhanshu, Director & Research Head, Amrapali Aadya. “If the government does reduce the import duty on gold (presently at 10%) as demanded by the bullion industry, we might see a perceptible boost in India’s consumption demand,” adds Sudhanshu. Given the employment generating potential of India’s gems and jewellery industry, the government should be giving domestic triggers to boost demand, that at present remains at about 50 tonnes a month. The government had imposed a hefty duty on gold imports to discourage its imports.

But has this reduced India’s propensity to consume gold? “Yes,” says Bhandari because the investment demand for gold is moving to financial products like sovereign gold bonds, equities and FDs. Gold bonds are indeed gaining momentum, reducing the physical import of gold. “And I see it becoming an excellent way to invest to meet the investment demand of gold in the country.”

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