Gold shines amid global volatility

Gold shines amid global volatility

By SHAILENDRA TYAGI | NEW DELHI | 9 July, 2016
The yellow metal has risen by over 25% so far this year that includes the gain of over 8% since 23 June when Britain decided to leave the European Union.

Gold prices shot up about 1% on Thursday as renewed fears about UK and Europe slipping into further economic distress brought down equities markets all across the globe. The uncertainty in global growth has driven up the demand for the yellow metal which is seen as a safe asset, especially in times of turmoil.  A lot of money from volatile stock markets is flowing into gold as Central banks of England, Europe and elsewhere have indicated to keep interest rates low to stimulate their sagging economies. “Gold returns in periods of low interest rates are historically twice as high as their long-run average,” feels World Gold Council. The spot price of gold reached $1,373 per troy ounce (31 grams), a high seen last in March 2014.  The price of gold in domestic market also rose by Rs 400 per 10 grams. The expectation of cheaper money from the Central bankers, however, cooled the gold prices down to $1367/Oz on Friday.   

Yellow metal has risen by over 25% so far this year that includes the gain of over 8% since 23 June when Britain decided to leave the European Union. This has surprised much of the world as “Britain has voted for sovereignty (importantly at the cost of uncertainty) over the status quo of illusive well being of an economic union called the EU,” said Chirag Mehta, senior fund manager with Quantum AMC. Gold is likely to rally as addressing uncertainties unleashed by Brixit seems like a protracted process. The pound sterling is already down 13% since 23 June and many feel that it would sink further. The US Federal Reserve also thinks it pragmatic to keep the interest rates on hold till the crucial impacts of Brexit are known. “If the market assessment of no rate hike remains correct, it would be extremely bullish for gold,” Mehta said.

The spot price of gold reached $1,373 per troy ounce (31 grams), a high seen last in March 2014.  The price of gold in domestic market also rose by Rs 400 per 10 grams. The expectation of cheaper money from the Central bankers, however, cooled the gold prices down to $1367/Oz on Friday.  

Investors’ interest in buying gold is likely to be sustained as yields from government bonds (again seen as safer asset) in much of the developed world is hovering at record lows. In fact, the yields are negative in Germany, Japan and Switzerland, meaning investors are paying from their pockets to (safely) park their money in government bonds. Analysts foresee a dim economic prospects unfolding in Europe. Although European Central bank’s intervention might provide stability to the financial markets, yet “the liquidity provision will not stop fiscal tightening from deepening recessions in Mediterranean Europe, widening deficits and debt ratios, and threatening banking crises”, Mehta said. And should the Brexit vote prove to be a forerunner of greater political and financial instability around the world, the gold is only expected to shine further.

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