Downside in gold looks limited amid stimulus hope from Fed, ECB

Jigar Trivedi

Last week Comex gold remained positive with a 0.9 percent rise & MCX April increased by 0.82 percent even though the dollar has reached a four-month high level. The downside in the bullion was limited as investors anticipate US Federal Reserve chair Jerome Powell & ECB President Christine Lagarde to provide stimulus due to fears of slowing global growth.

The coronavirus outbreak in China has infected over 70,000 people and killed more than 1,700. The jump in new cases puts extra pressure on the Chinese government to treat thousands of patients, many of whom are in mass quarantine centers or in isolation facilities.

Bullions climbed after Hubei, the Chinese province in the middle of the outbreak, reported more fatalities, bringing the nationwide total near 1,500. Investors are weighing the spread of the disease, in addition to the news that the Federal Reserve will dial back liquidity injections.

The greenback has reached a four-month high level due to havens buying and weak undertone in the Euro as Euro-zone industrial production for January de-grew at 2.1 percent with forecast of de-growth of 1.6 percent and growth of 0.2 percent in December. US Federal Reserve Chair Jerome Powell during his testimony reiterated his confidence in the US economic outlook, even as he said he expected some drag "soon" from China's new coronavirus epidemic. US Treasury Secretary Steven Mnuchin said that the negative economic impact from the virus outbreak is a one-time event that will not last beyond 2020. Retail sales in the US increased 0.3 percent month-over-month in January of 2020, slightly higher than a downwardly revised 0.2 percent gain in December and in line with market expectations. The SPDR Gold ETF has increased to 924 tonnes from 916 tonnes as on last Friday.

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MCX gold could be challenging an all-time high of Rs 41,297 in the coming session since the undertone is positive. FOMC and EBC minute will be out next week hence traders might take cues from the same for further confirmation. The safe-haven buying has emerged in both the greenback and the yellow metal too. If we look at Comex gold closely, $1,545 to $1,590 is a consolidation zone and we believe this may continue for the next couple of weeks too with a positive undertone.

Once $1,590 is broken with strong volume support it may unleash an unprecedented force in the gold market. Gold's consolidation in recent weeks is not yet over, but everything points to a break above the $1,590 mark by spring. Because and even though gold has already increased by over $450 from the low at August 2018, the bulls remain in control and are not showing any weakness. China will be in the centre of the investors? focus as side spreading virus has already threatened the global growth prospects. We believe, not only ECB or FED but PBoC too will provide massive stimulus to bring back the economy where it was an epidemic before.

From an economic data point of view:: Monday is a holiday in the US due to Washington's birthday. Japan's Q4 GDP, on Tuesday Germany economic survey & the US empire state manufacturing index for February, on Wednesday US will release building permits & housing starts for January, Philly Fed Manufacturing Index for February lastly on Friday Manufacturing PMI & existing home sales for January will be releasing hence we expect the dollar to be volatile so as the bullions.

(The author is Fundamental Research Analyst - Commodities at Anand Rathi Share and Stock Brokers.)