Equity Gains Cap Gold Shine; Market Apprehensive Over Risky Assets

  • Jan 22, 2020 AEDT
  • Team Kalkine
Equity Gains Cap Gold Shine; Market Apprehensive Over Risky Assets

Gold a ‘posterboy’ for many media houses over the strong performance in 2019, anticipated surge in the events of rising geopolitical issues, and a slight recovery in the global economy. Gold spot surged from USD 1,536.03 per ounce (intraday low on 14 January 2020) to the present level of USD 1, 568.66 (as on 21 January 2020, 5:50 PM AEDT), an increase of ~2.12 per cent; however, down ~2.65 per cent from its 2020 peak of USD 1,611.52 per ounce (intraday high on 6 January 2020).

The demand from gold-backed ETFs is on an upsurge in the wake of falling interest rate, overvalued stock indices, and geopolitical events such as of war tensions between the U.S-Iran, ongoing trade dispute between the United States and China and much more.

To Know More, Do Read: ETF Gold Rush and Future

The bilateral trade issues recently witnessed a trade pact during the Phase 1 of the trade deal, which exerted slight pressure on gold; however, bullion investors were quick to factor-in the bigger picture, and gold is now shining brighter and brighter as days passing by.

Flourishing Global Economy or Tentative Stabilisation?

The global financial market is currently on the positive side amid certain factors such as recovery in manufacturing activities in China and the United States, subdued fears over no-deal Brexit, intermittent favourable news over the bilateral trade dispute, which had embarked a comeback from risky environment witnessed during September 2019 quarter.

The International Monetary Fund forecasted the global growth to surge and stand at 3.3 per cent in 2020 (2.9 per cent in 2019), and expects it to further increase by 100bps to stand at 3.4 per cent in 2021; however, the recent forecasts by the consortium is below its October forecast by 100bps for 2020 and 200bps for 2021.

The major reason for the slash in recent forecast against the October 2019 forecast was slower than anticipated performance of emerging countries, mainly India. IMF reassessed forecast for India and slashed the growth outlook twice over the last two years.

While the group still expects subdued growth, the dark cloud of political unrest still remains as a major risk factor for the equity market, and in tandem, positive for bullions. The risk factors assessed by IMF includes raising war tensions between U.S-Iran, worsening relations of the U.S. with its trading partners, which if unfolds could decline the projected growth further.

Favourable Environment for Gold

S&P/ASX 200 Index and S&P/ASX 200 Index/AU10YT Ratio (Source: Thomson Reuters)

While the S&P/ASX 200 Index is hitting new highs amid improved market sentiments over the risk assets, the ratio of the index with Australian 10-year bond yield is on a slump from its peak, which further suggests that the market is not discounting the risk-free assets in proportion with the gain in equity indices.

The action of market participants suggests that some investors are getting risk-averse despite a potential tentative recovery in global economic conditions and favouring the low-interest, which is currently being provided by the fixed-income instruments.

Dollar Index (DXY), Gold Spot (USD) and DXY/US10YT Ratio (Source: Thomson Reuters)

While the equity indices are comparatively overvalued thanks to the prevailing interest rate scenario, the currency market (USD = DXY) is on a plunge and investors are factoring-in that fact into the U.S. 10 year bond yields and the DXY/ US10 Year yield ratio is now sloping downward (as marked), which further suggests that the current discount factor in valuing the bond yield lower in proportion to the gain in currency value; a relation which is well reflecting the market apprehension over growth in currency market, which is currently good for gold ahead.

India Slower Growth to Hamper Jewellery Demand?

India is among the top gold consumer in terms of jewellery, which represents over ~40 per cent of gold consumption worldwide, alone. The introduction of GST (Goods and Services Tax) in India in 2017 surged the taxes and the increase in gold import duty by the government by 2.5 per cent from 10 to 12.5 per cent, which coupled with higher gold prices in the marketplace had dampened the consumer sentiments.

The Q3 2019 demand for jewellery in India plunged by 32 per cent to stand at 101.6 tonnes as compared to the demand of 148.8 tonnes in the previous corresponding period (or pcp).

However, as per the All India Gem & Jewellery Domestic Council, the inbound shipment for gold might surge to 750 tonnes in 2020, up by ~8.70 per cent against the previous year estimated 690 tonnes. The organisation believes that the coming marriage season would prompt the people to buy gold and would change their current stance, which is to wait for the correction in gold prices.

The current recovery in the economic outlook has currently shackled the gold bulls; however, there are many other risk factors, which are looming the global economic conditions, and it would be interesting to watch where these risk factor if unfolds, would lead gold ahead in the future.

Also Read: Get Ready to Pay ~2.8k for 24k Gold; Gold Bulls Break the Gated Cage

Key Takeaways

  • Gold prices are currently recovering in the market after a slight pause amid phase 1 of the trade deal.
  • Gold backed-ETFs are currently filling in gold over the anticipated bright outlook.
  • Equity market presently contains several risk factors such as war tensions between the U.S-Iran, ongoing trade dispute between the United States and China and much more.
  • The global financial market is currently on the positive side amid certain factors such as recovery in manufacturing activities in China and the United States, subdued fears over no-deal Brexit, intermittent propitious news over the bilateral trade dispute.
  • The Internal Monetary Funds slashed the global growth recently against the October outlook.
  • While the group still expects somewhat muted growth, the dark cloud of political unrest still remains as a major risk factor for the equity market, and in tandem, positive for bullions.
  • The ratio of S&P/ASX 200 Index with Australian 10-year bond yield is on a slump from its peak, which further suggests that the market is not discounting the risk-free assets in proportion with the gain in equity indices.
  • DXY/ US10 Year yield ratio is now sloping downward, which further suggests that the current discount factor in valuing the bond yield is lower in proportion to the gain in currency value.
  • The Q3 2019 demand for jewellery in India plunged by 32 per cent to stand at 101.6 tonnes as compared to the demand of 148.8 tonnes in the previous corresponding period (or pcp).
  • However, as per the All India Gem & Jewellery Domestic Council, the inbound shipment for gold might surge to 750 tonnes in 2020, up by ~8.70 per cent against the previous year estimated 690 tonnes.

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