Commodities

Why Gold prices touched highest level since 2013

Updated : June 21, 2019 03:03 PM IST

Today, the safe haven commodity rose 1.5 percent to cross above $1,400 for the first time since September 2013.

The trade war between US and China is one of the biggest factors that have turned the central banks towards gold.

In 2018, central banks added an incredible 651.5 tonnes gold to their holdings.

Why Gold prices touched highest level since 2013

Gold has had a lacklustre performance since the start of 2019, but in the last one month, there has been a good run-up in the gold prices. Today, the safe haven commodity rose 1.5 percent to cross above $1,400 for the first time since September 2013. The rise comes on the back of trade war worries, tensions in the Middle East, hints of a rate cut from the US Federal Reserve and volatility in the stock markets.

In 2018, central banks added an incredible 651.5 tonnes gold to their holdings, not only the biggest in 47 years but also the second highest annual total on record (only surpassed in 1967, when central bank gold reserves increased by 1,404 tonnes), a recent report by Motilal Oswal Financial Services showed.

March-quarter report by World Gold Council showed that some central banks in Asia including China, India and Kazakhstan and from Europe such as Russia, Poland, and Hungary have begun accumulating Gold, although in minimal quantity, and that is starting to reflect on prices.

"Gold is getting another boost from a change in tone from major central banks who are changing their stance from hawkish to neutral or dovish. Central banks of all major countries are on the back foot and concerned about the global economic slowdown and its impact on the economy," the report said.

Central banks have been on a gold buying spree in the last one month and select Asian and European countries are playing a big role in increasing the gold reserves, it added.

The trade war between US and China is one of the biggest factors that have turned the central banks towards gold. When the year started, negotiation between the two major economies was in the early stage and it seemed that both would manage to come to a conclusion, but things turned ugly and the US President imposed further import tariff on Chinese goods.

Leaders of both these economies are expected to meet at the G20 meeting and there are high chances that both may manage to at least come on terms to sign a deal.

MOSL said that China, the world’s top gold producer and consumer, is facing the prospect of slowing domestic economy which leads to safe-haven buying.

"China is the world’s largest foreign exchange reserve holder, and the world’s second largest economy, and recently joined the global central bank gold rush by increasing its gold reserves. In the past, China has been reluctant to diversify its $3 trillion reserve position into gold but now have decided to make the change as a “safe haven hedge” amidst geopolitical risks. It explicitly announced in 2013 that ‘it is no longer in our best interests to stockpile US dollars,’" the report observed.

Central bank buying gold could support the metal and also overcome the risks and losses that may happen in the future.

WGS, USGS, S&P global and many such institutions have said that global production has already started to hit highs. Countries look in no mood to stop the buying as uncertain weather continues to hover several economies, they added.

Going forward, MOSL believes that the buying spree may not end soon, but the pace of buying could get a little slow as prices have started to rally recently. They expect that escalating trade tensions between many countries could disturb the sentiment in the medium term and central banks could find cover under the ‘Gold Shade’.

"Till the time uncertainties related to trade war remains elevated it is unlikely that gold prices may witness immediate selling pressure. At this point in time everyone is concerned and looking for safeguarding their economy," it maintained.

On the domestic front, it has also come to light that RBI is likely to join its counterparts Russia and China in scooping up gold this year, adding to its record holdings and lending support to worldwide bullion demand, the brokerage noted.

The RBI increased its stash by about 42 tons last year, and after adding more this year, the country’s gold reserves now stand at a record high of almost 618 tons, the report further said.

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