The dichotomy of metal stocks and precious metal — gold

Arpan Shah

Nifty Metal index has made a top in January 2018 and it has been in correction mode since last 1.5 years.

It made a top around 4,200 level and fell towards 2,650 level in February 2019; correcting more than 35 percent from the top. It did bounce back a bit in recent months but is still trading near 3,000 level.

Many retail investors are scratching their heads and trying to find the reason for this big fall.

Base metal prices are in a downward trend for the past few months and any attempt of recovery has seen a sell off from higher levels. The reason for the fall in the base metal prices are global slowdown and trade tensions between major economies.

Global economy has slowed down in recent years and IMF has lowered its 2019 global growth forecast to 3.3 percent from 3.7 percent predicted earlier.

Two of the biggest economies USA and China are imposing tariffs on imports. There have been multiple attempts for the trade talks but till now there has not been any fruitful outcome.

Things have escalated so much that we are on the brink of global trade war if things does not get resolved via talks. The only way we can see some rebound in Metal stocks and Base metal prices is if things get resolved between US-china and the global demand picks up.

But on the other hand precious metal Gold is showing signs of recovery on the upside. Last week Gold has given a breakout from its 6 years consolidation.

In international markets, gold price has been consolidating in $1,050-1,350 an ounce range for the past few years but in last week it has broken out from this range with rounding bottom formation. Other technical aspect momentum indicator MACD is also supporting this breakout.

The major reason for this breakout is the dovish stance from European central bank as well as Federal Reserve. Both the major central banks had adopted a dovish stance recently and they will be easing in coming months if needed.

Apart from that, recent geopolitical tension between USA and Iran is also supporting the rally.

The recent breakout in the yellow metal is quite significant as it has happened after six years and backed by both fundamental and technical reasons. In coming weeks if the gold sustains above $1,340 level then we can expect continuation of this rally.

Though we have seen this kind of dichotomy between gold and base metal in the past, there is a possibility of this trend continuation in near term.

(The author is Technical Analyst – Research at Monarch Networth Capital.)

Disclosure: Analyst does not have any direct or indirect financial interest nor any other material conflict of interest at the time of stock recommendation in the subject company. Analyst does not have actual/beneficial ownership of one percent or more securities of the subject company. Analyst does not own any stocks however my relatives might own a few of the stocks in their portfolio.