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Gold Prices Hold Steady Amid Political And Economic Uncertainty

by Barbara Miller

New Delhi, Nov 5 (PTI): Gold prices saw a slight uptick of 0.11%, closing at Rs 78,507 per 10 grams on Tuesday, driven by heightened political and economic uncertainty, particularly surrounding the U.S. presidential election. As concerns over potential inflationary policies and the future direction of monetary policy in the U.S. grew, investors turned to gold as a hedge against these risks.

Political Uncertainty Drives Gold Demand

The recent surge in gold prices has been largely attributed to the growing uncertainty surrounding the upcoming U.S. presidential election. As political tensions rise and speculation about the potential impact of the election on economic policies intensifies, demand for gold has strengthened. Investors are increasingly looking to gold as a safe haven asset that can protect against the risk of inflation, especially as the possibility of inflationary fiscal measures gains traction.

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In addition to the political landscape, gold prices were also buoyed by market anticipation surrounding the U.S. Federal Reserve’s upcoming monetary policy announcement. Following a significant half-point interest rate cut in September, markets widely expect the central bank to implement a more modest 25 basis point reduction at its next meeting. The potential for further rate cuts, particularly in response to slowing economic growth, has added to the appeal of gold, which traditionally benefits in environments of low interest rates and economic uncertainty.

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Economic Data Adds Fuel to Gold’s Rally

Gold’s recent price gains are also being supported by weaker-than-expected U.S. economic data, which has raised concerns about the strength of the U.S. economy. The latest nonfarm payrolls report showed only a 12,000 increase in October, far below the expected 113,000 rise. This disappointing labor market data, coupled with GDP growth for Q3 coming in at a lower-than-expected 2.8%, signals a cooling economy. This economic slowdown has led to increased speculation that the Federal Reserve may continue its accommodative monetary policy, including additional rate cuts well into 2025.

As the U.S. economy shows signs of slowing down, gold has gained favor as an investment option. With inflation still a concern and a potential economic downturn on the horizon, gold is increasingly seen as a safe store of value, particularly in times of financial instability. The market has reacted to these data points with increased buying interest, pushing prices higher despite the higher levels they have already reached in recent months.

Demand in India Remains Strong Despite High Prices

On the demand side, India, one of the world’s largest gold markets, saw strong festival-related purchases, with consumers buying gold for the Diwali and Dhanteras festivals. However, the higher prices of gold have somewhat subdued overall demand, with dealers reporting fluctuating premiums and discounts. During Dhanteras, the premium on gold spiked to as much as $5, compared to a $1 premium earlier in the season. This reflects the challenge that high gold prices pose to the volume of gold transactions.

At the same time, dealers in other key Asian markets also reported fluctuating demand. In Singapore, gold prices ranged from a $0.80 discount to a $2.20 premium, while in China, discounts were seen in the range of $11 to $14 per ounce. Meanwhile, Japan experienced a slight fluctuation between discounts and premiums, reflecting the continued global sensitivity to gold prices.

According to the World Gold Council (WGC), global gold demand in the third quarter of 2023 remained relatively stable, excluding over-the-counter (OTC) trading, with a total of 1,176.5 metric tons of gold being purchased. The report highlighted a significant increase in inflows to gold exchange-traded funds (ETFs), which saw a net increase of 95 tons, signaling investor confidence in the asset. However, jewelry demand, a key driver of physical gold consumption, dropped by 12% year-on-year, largely due to high prices and weaker consumer purchasing power in some regions.

Technical Analysis of the Gold Market

On the technical front, the gold market is currently undergoing a short-covering phase, as open interest on gold futures contracts dropped by 5.97% to 12,354 lots, signaling that some investors are closing out their positions. This reduction in open interest, along with a modest increase in gold prices, suggests a period of consolidation, with gold finding support at Rs 78,235 per 10 grams.

Should the price fall below this level, further testing is likely around Rs 77,965, which could indicate a potential retracement before any significant rebound. On the upside, gold faces resistance at Rs 78,730 per 10 grams. If this level is breached, the price could rise to Rs 78,955, suggesting that gold has the potential for further gains in the near term if it manages to surpass the current resistance level.

Outlook for Gold Prices

The outlook for gold prices remains mixed, with various factors influencing the direction of the market. The ongoing uncertainty surrounding U.S. political developments, coupled with weaker-than-expected economic data, continues to support demand for gold as a hedge against risk. Additionally, expectations of further interest rate cuts from the U.S. Federal Reserve could provide further upward momentum for gold prices.

However, the high price of gold may dampen demand for physical gold, particularly in key markets like India, where consumers are more price-sensitive. The WGC’s report suggests that while ETF inflows have increased, the decline in jewelry demand could offset some of the positive momentum in the market.

Looking ahead, the future direction of gold prices will depend largely on the trajectory of global economic conditions, inflation expectations, and monetary policy decisions by central banks. If the global economic slowdown continues and inflationary pressures persist, gold could maintain its position as a preferred asset for investors seeking stability in uncertain times.

Conclusion

Gold prices have remained steady, buoyed by a combination of political uncertainty surrounding the U.S. election, weak economic data, and expectations of further interest rate cuts by the Federal Reserve. While demand for gold in key markets such as India and China remains fluctuating, strong investor interest in ETFs has helped support the price of the precious metal.

As investors continue to navigate a landscape of economic uncertainty, gold is likely to remain a popular asset for those seeking protection against inflation and market volatility. Whether the metal can sustain its upward momentum will depend on a variety of factors, including future monetary policy decisions, global economic growth, and consumer demand trends.

For now, the market is in a wait-and-see mode, with the potential for further price gains if gold can break through its current resistance levels, or a possible correction if demand falters due to high prices. As always, investors should remain cautious and keep a close eye on both technical and fundamental developments that could influence the price of gold in the near term.

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