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The bullion prices are on a surge amid major economic trends and a weaker dollar. The dollar index is dropping due to ongoing trade talks between U.S-China, which in turn, is supporting the gold prices. The various other factors extending support to the gold and silver prices are global financial market instability, which is curbing the risk appetite of the market participants due to high volatility in the global financial assets and structural economic reforms. Against the backdrop, gold has an increasing role to play in an investor's portfolio.
Gold past performance:
Source: Bloomberg, ICE Benchmark Administration, World Gold Council
Gold outperformed most global assets in terms of absolute returns as of 31st December 2018 due to many global dynamics seeded over the year of 2018. The issues over the U.S-China trade war and U.S-North Korea nuclearization/de-nuclearization talks and uncertainty over the developments during the year provided a significant impetus to gold prices, and as a result, gold extended its gains and outperformed most of the asset class.
Present Trend:
Gold prices surged and reached a level of $1341 an ounce (as on February 20, 2019, 04:14 GMT) marking its highest peak since April 2018. The gold price soars amid a weaker dollar caused by the dovish stance by the Federal Reserve. The dollar index future topped out at approximately 97 levels and fell to make a low of approx.96.25 and is currently marking a stagnant move around 96.35 level. The stagnancy in dollar index is marked in the absence of any strong impetus. The interest rate hold by the Federal Reserve is also exerting pressure on the dollar, which in turn, is supporting gold prices.
The federal reserve had put the interest rate on hold keeping in mind the moderate inflation and rising risk to global economic growth. The FED chairman Jeremy Powell said that the halt in the rising interest rate environment was not because of the domestic economy, which he said is solid but was mainly due to global factors such as slower growth in major market including China, Europe, as well as uncertainty over the U.S-China trade war and the U.S. government temporary shutdown and Brexit.
Major central banks of various economies are also buying gold to reduce their exposure to the U.S. dollar, which in turn is supporting gold prices. In fact, Central bank purchasing of gold reached its highest levels in the past 50 years. As per the data from the world gold council, the central banks cumulative net buying reached $27 billion, mainly driven by Russia, whose net buying was up 74% as compared to previous year and reached 651.5tonnes, out of which Russia alone bought 274.3 tonnes of gold last year. Russia, in order to surpass the dollar completely, is buying gold from domestic production. Apart from Russia countries such as China, Turkey, Kazakhstan are among the other major buyers of gold.
Silver fundamentals mainly oscillate around gold as both the precious metals are sought during the time of uncertainty and regarded as safe-havens. However, silver prices underperformed the gold prices, with gold-silver ratio holding near a 25-year high and is currently moving around 84 points. The global uncertainty and financial market stability, which supports gold prices also support silver prices as it is also regarded as a safe-haven.
Silver being of industrial application tends to get impacted from base metals prices as well. The global slow-down growth story which is exerting pressure on the industrial commodities and supporting the gold prices, somewhat putting pressure on silver prices as well and mainly due to this reason the gold-silver ratio is marking a 25-year high and holding around 84 points and in turn silver is currently underperforming the gold price. Japan's on-going solar projects and increase stance by various other economies to shift towards zero emission economy can support silver prices, and the market participants will be eyeing on the developments to gauge the relative performance of silver as compared to gold.
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