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Gold prospects brighten amid brisk buying by the Chinese central bank

When equity markets globally are looking tentative, it would make sense to look at other investment opportunities. And gold is showing a lot of promise this year.

The yellow metal is expected to see some momentum this year, as some central banks have started buying gold. A Bloomberg report showed the People’s Bank of China increased its gold holdings to 59.94 million ounces, or about 1,864 tonnes, by the end of January from 59.56 million ounces a month earlier.

The central bank added around 11.80 tonnes in January after taking in just under 10 tonnes in December, which was the first time PBOC boosted its hoard since October 2016.

In international markets, gold price has already jumped 2.21 per cent to $1316.15 per troy ounce on February 13 from $1287.70 per troy ounce on December 31. On the other hand, the yellow metal has rallied over 4 per cent to Rs 32,850 per 10 gm in the domestic market.

Hitesh Jain, Vice President, YES Securities said gold has started this year on a strong note, and that strength is expected to persist given the uncertain trade outlook and the recent Fed policy reset.

The US Fed tilted towards dovish stance in January, turning ‘patient’ on future rate hikes. The central bank signalled that it would not hesitate to slow down asset sales. Markets now perceive barely any chance of a rate hike this year. In fact, there is a strong chance of a rate cut in 2020.

The Fed is certainly concerned about the slowing global macro backdrop, gloomy trade scenario and fragile financial markets. This can be corroborated from Fed projections of slower GDP expansion for 2019 and 2020.

Jain said gold as an investment avenue will remain in the reckoning, with market participants cognizant of the fact that global macro numbers are turning soft as manifested in the flashing signals of slowing economic activity in China, US and Europe. Numbers of tailwinds are in place for gold to move higher, including softening US sovereign yields, stalling US dollar and wobbly global equities.

A rise in gold purchases by central banks to the highest since 1967 helped push global demand for the metal up 4 per cent in 2018, the World Gold Council (WGC) said.

Gold consumption rose to 4,345.10 tonnes in 2018 from 4,159.9 tonnes in 2017, WGC said in its latest quarterly demand trends report. Driving the increase were central banks, which purchased 651.5 tonnes, 74 per cent more than that in 2017, and the second highest annual total on record as China and Poland joined Russia, Turkey and Kazakhstan in adding to their reserves, WGC said.

“Inflows into global gold ETFs are picking up gradually. We remain constructive on gold given the current multitude of variables, namely weaker dollar, dormant US rates and a dovish Fed. Prices could push higher going into next few quarters, with the trading range seen between $1,250-1,450 for 2019,” Jain said.

The Reserve Bank of India (RBI) in September last year also bought gold for the first time in nearly a decade.

As on June 30, 2018, the bank holds 566.23 metric tonnes of gold as compared to 557.77 metric tonnes as on June 30, 2017. The increase is on account of addition of 8.46 metric tonnes of gold during the year, according to its latest annual report.

Chirag Mehta, Senior Fund Manager-Alternative Investments, Quantum Mutual Fund in a column said, “Given the macroeconomic picture, gold will be a useful portfolio diversification tool and thereby helping you to reduce overall portfolio risk.”