Insurance against Event Risks & Inflation is Cheaper: Time to Buy Gold

“Gold tends to do well when other assets do badly, but it does best of all when people lose faith in central bankers,” Ash told CNBC via email on Tuesday.

“Gold and silver are highly likely to rise sharply if the sudden consensus that the ECB (European Central Bank) and even the Bank of England might join the Fed in cutting back stimulus evaporates just as quickly when they disappoint,” he added.

Meanwhile, Suki Cooper, a precious metals analyst at Standard Chartered Bank, also said the current price point is a buying opportunity.

“Gold prices closing in on $1,200 per ounce offers attractive opportunities to buy,” she said in a research note published Monday.

But Cooper warned that there are several near-term headwinds which will keep gold price’s weak. Firstly, yields on the benchmark 10-year Treasury note are around 2.4 percent, a high last seen in mid-May.

“The pullback in gold has coincided with the rise in U.S. real yields to the year’s highs as well as the sharp increase in real yields in Europe to the highest levels in more than a year,” said Joni Teves, a UBS strategist, in a research note on Monday.

Secondly, India’s biggest tax reform in 70 years, the Goods and Services Tax (GST), will weigh on demand during July. The tax kicked in on July 1 and increased the tax on gold from 1.2 percent to 3 percent.

“Media reports say that demand fell by 50 to 75 percent on the first trading day in July and foot traffic was lower,” said Cooper.

“Initial anecdotes reaffirm our view that demand is likely to be weak at first as challenges over invoicing and inventory are resolved, but thereafter to recover,” she added.

The long and short of gold

Despite these headwinds, investor positioning is likely to support gold, according to UBS.

Net long positions – where in investors bet that the price will go higher – in gold have been cut by 53 percent, or 12 million ounces, over the past four weeks, as short positions – bets that gold prices will fall – have increased, according to UBS. This change will limit the market’s selling power.

“It is likely to become increasingly challenging to put on sizeable positions considering that gold has already fallen considerably, unless there’s strong conviction for a move towards $1,100, which we don’t think is the case,” said Teves.

“We maintain our view that gold should recover from this latest pullback as the move higher in real rates is unlikely to be sustained and we see longer-term value around these levels.” – Luke Graham

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