Strong dollar, strong gold working now because central banks are buying left, right & centre.: Kunal Shah, Nirmal Bang

Synopsis

Central banks buying gold amid geopolitical tensions, are impacting prices. Dollar strength boosts gold. Corrections are expected due to US inflation while rate cuts are anticipated from major banks. Gold remains a strategic investment with limited short-term upside. Shah says: "Dollar strong, gold strong is working because central banks are buying left, right and centre."

Kunal Shah, Head of Commodities Research, Nirmal Bang Securities, says all the major central banks, especially the Chinese and Russian ones, are buying gold aggressively. They are diversifying their foreign exchange reserves slowly and gradually towards gold and the point of view is if the geopolitical scenario worsens, gold is going to react like the way it reacted right now. The traditional economic theory of stronger dollar, lower gold price is not working. Dollar strong, gold strong is working because central banks are buying left, right and centre.

Do you see the run being very momentary as far as gold and silver prices are concerned?
Kunal Shah: Right now, it seems that there is no point in aggressively buying at these levels. There is a possibility of some correction due to any reasons which may come up, maybe out of US inflation numbers or any other trigger. But recently the surge in gold prices is a combination of many things and one of the major things which I would like to talk about is what is happening since the geopolitical landscape of the global economy is worsening.

China and Russia have huge dollar foreign exchange reserves if the geopolitical conflict is getting escalated, where are they going to sell those reserves? They may get a sanction, they may get their dollar reserves frozen by the US. That is why these people are buying gold left, right, centre. All the major central banks, especially the Chinese and Russian ones are buying gold aggressively. They are diversifying their foreign exchange reserves slowly and gradually towards gold and the point of view is if the geopolitical scenario worsens, gold is going to react like the way it reacted right now.

From the point of view of central bankers, if I am a PBOC (People’s Bank of Chona) and if I have to diversify 20% of my foreign exchange reserve and if I am not going to put that money in US treasury, Japan's treasury or Europe's treasury, then where am I going to put my money? So, the gold rally has to do more than logic and not just a normal traditional economic theory that the stronger dollar, lower gold price is not working. Dollar strong, gold strong is working because central banks are buying left, right and centre.

The second thing is the rate cut narrative. Last year, we saw gold making a high of $2100 with interest rate at 5.5%. This time we are going to see at least two-three rate cuts. So, the entire path of the monetary policy is changing. Gold should have responded and most of the people argue that since there is going to be a rate cut in the second half, why did gold rise in the first half? What do you think, gold will wait till the time the central bank will cut the rates?

No. We have seen a rally across all commodities. The market is expecting a sharp U-turn in the monetary policy of the European Central Bank, Federal Reserve, UK Central Bank, all of the western central banks are going to cut the rates irrespective of where the inflation is because they cannot service their debt if the yields keep rising. So, the narrative of rate cut is the second reason apart from what central banks have been doing and that makes a very strong case that whenever there is a correction of $100, $120 in gold, maybe perhaps around 2300 or 2280, these are the times you again buy gold. Gold is going to go up. It is a strategic investment and irrespective of price level you have to be in gold.

What is your medium-term and short-term outlook?
Kunal Shah: Near term, gold prices have risen to the extent that another $20-30 of upside would be something in which something people should sell. So 72,500-72,600 is the kind of level where one should sell gold and in some time, may reach 70,000 or 69,500 levels in some time. Keep a stop loss of around 73,800. But near term, the upside is not limited. We are going to see some corrections going forward.

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