Spot gold below $2,000, what next for yellow metal?

Hareesh V

Gold succumbed to a correction recently on optimism that the deadly coronavirus pandemic may be under control soon and that would encourage the global economic sentiment. However, prices managed to sustain above $1,900 an ounce in the international market and Rs 50,000 per ten grams in the domestic futures market.

The safe-store demand for the metal has remained on the higher side since the coronavirus outbreak. In the first week of August, the benchmark London spot prices jumped to an all-time high of $2,072.49 an ounce. Rising cases in the US, the world’s largest economy, has shifted investor confidence from riskier assets to safe havens like gold.

A weak US currency, hopes of more fiscal stimulus measures and looming US-China trade tensions also added fuel to the bull market run in precious metals.

However, hopes of recovery after Russia announced the first COVID vaccine and encouraging results from more vaccine trials hit the safe-haven demand.

Higher level profit booking, technical correction and a slight recovery in the dollar weighed on the yellow metal. After the vaccine announcement, London spot gold corrected about 7 percent, while it plummeted more than 10 percent in the domestic market.

Now, the question is whether the ongoing momentum is an early bearish signal for gold? The answer is no. Prices may continue with a positive bias, though it eroded the extreme bullish outlook that was seen earlier.

The multi-year bullish cycle may perhaps extend until the global economy returns to the pre-pandemic stage. However, easing US–China trade tensions and a sharp rally in the dollar will push the metal into a bearish territory.

The recent US data shows that the recovery will be delayed. US growth contracted at 31.7 percent QoQ in the second quarter of 2020, as per the second estimate of the GDP.

The consumer confidence fell for the second straight month, with the consumer confidence index declining to 84.8 in August, down from a 91.7 in the previous month.

Likewise, the job growth numbers also slowed in August. Weak numbers from the world’s largest economy underscore the impact of pandemic on global growth momentum.

The Chicago Federal Reserve called on Congress to deliver more fiscal aid and signalled its monetary policy would be eased further.

It also hinted that interest rates will be kept at ultra-low level for years to help the economy into pre-pandemic strength. Historically, economic easing measures could lift the appetite for gold.

The bilateral relation between US and China support the bullion market. US President Donald Trump revoked the trade talks with China scheduled for August 15, raising doubts over the Phase Two trade deal.

Gold holdings of the exchange traded funds continue to surge higher. Physical holdings of the world’s largest gold ETF, the SPDR Gold Trust increased by 0.77 percent in August, totalling more than 40.23 million troy ounce as on August 28.

The hedge funds and money managers trimmed their net long positions in Comex gold contracts, data released by the US Commodity Futures Trading Commission (CFTC) shows.

Looking ahead, due to its special appeal as a safe haven during periods of economic stress, gold’s demand will continue to be on the higher side.

Hopes of fresh stimulus measures, weak US currency and political unrest in many countries offer lower level support to the yellow metal. Anyhow, despite its strong fundamentals, intermittent corrective selloffs cannot be ruled out in the immediate future.

The author is Head of Commodity Research at Geojit Financial Services.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. Credit: MoneyControl

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