Rising interest as gold spikes

International tensions have played a part in the recent gold market movements Photo: Le Toan

In the first few days of July, spot gold on global markets rose 1.1 per cent and reached $1,433.5 per ounce. While US gold futures were up 2.1 per cent at $1,437.7 an ounce, the USD index, which measures the currency against a basket of six rivals, was down 0.1 per cent. This is the highest level in the past six years for the metal.

In Vietnam, latest statistics show that gold prices varied between VND38.9-39.2 million ($1,691.3-1,704.3) per tael at DOJI Jewellery. At stores run by competitor Phu Nhuan Jewellery, the yellow metal rose to VND39.17 million ($1,703.04) per tael, which marks the peak since 2017. An ounce is valued at 75 per cent of a tael.

Various reasons have been put forward for investors’ rising appetite for gold. As usual, mounting geopolitical uncertainty bolsters the demand for the precious metal, which is often viewed as a safe haven during times of upheaval. From American political tensions with Iran to the unsolved trade conflicts between the US and China, a sense of uncertainty continues to pervade the globe.

Earlier this week, the US ratcheted up pressure on Europe in a long-running dispute over aircraft subsidies, threatening tariffs on $4 billion of additional EU goods, on top of products worth $21 billion that were announced in April 2019. Besides, Europe and China are being accused of manipulating currencies.

Updates from the US Federal Reserve are also driving down the USD, which usually helps gold rally. Investors have priced in at least a quarter-point cut at the Fed’s next meeting at the end of July, with 20 per cent expecting a half-point move, according to US-based risk management firm CME Group. Similarly, most experts believed that the Fed is likely to deliver a cut in its benchmark short-term interest rates.

“Gold prices in Vietnam rose due to upward movements in the international gold market. On a global scale, gold’s rally has been fuelled by the Fed’s decision to delay rate hikes, which drove the USD down and pushed gold prices up,” said economist Nguyen Tri Hieu.

Gold has long been considered a hedging tool against inflation and often moves inversely with the value of the USD. It often holds its value during times of uncertainty in markets, earning it the nickname “safe haven asset”.

However, gold also has its downsides. Unlike bank deposits or securities, the precious metal normally pays no interests or dividends and also costs money to preserve. That means gold loses its glitter when interest rates rise, and investors can have a higher profit on other assets.

Experts warn that the price of gold is determined by supply and demand, making it susceptible to sudden movements. According to Hieu, this means it is unsuitable for short-term investors and speculators.

“Investors should be careful, especially those with a short-term investment horizon. Gold trading requires the investor to have experience to monitor and analyse the market,” said Hieu.

Phan Dung Khanh, gold analyst at Maybank Kim Eng Securities said, “It’s not a good idea to buy gold now, because prices might not go up that much in the mid-term ­future. Gold quotes remain highly volatile in the short term, which is why I caution investors against ­speculation and the herd-buying mentality.”