Defying widespread expectations amid supportive conditions, gold has failed to decisively stay well above the psychological $1,700 per ounce level. Conditions for the yellow metal to gain are all in place — spread of Covid-19, serious concerns over global economic growth, renewed tensions between the US and China, not to speak of the humongous liquidity in the marketplace.
Demand destruction
Yet, the metal is struggling to stay close to $1,700/oz because of the creeping risk-on environment and massive demand destruction, especially in two of the world’s largest markets, China and India. So, what’s keeping gold still attractive? While import demand has all but dried up in the East, investment demand is picking up in the West.
Global economic indicators continue to show signs that the downturn may be bottoming out. The creeping risk-on environment following the flow of improved data is one reason that has for the time being capped the metal’s upside. Cities hitherto locked down are opening up. China is up and moving ahead.
No wonder, investors in the stock market are responding favourably by moving there. The moot question is whether the risk-on mood will sustain. If it does, then less-committed gold bulls and investors are sure to exit the metal and move to equities in greater numbers.
Imports down
Gold imports have hit the bottom. April seems to be worst month so far in terms of volume imported into China and India. The estimated inflow into China is a paltry five tonnes, while imports in the first quarter were an estimated 36 tonnes. According to reports, China exported gold in April, adding to global supplies.
India’s import performance was pathetic by past standards. For a country that imported several tens of tonnes of the yellow metal month after month for last 20 years, April arrivals were just at about 500 kg. This is clear demonstration that physical or jewellery demand in India has completely evaporated. Admittedly, lockdown contributed to supply disruption.
The cost of ₹47,000 per 10 grams is too high for any normal middle class household to pay. Rural India is now busy with kharif season operations. The ongoing national lockdown has exacerbated the situation. In other words, gold demand in the country stands destroyed at the current exorbitant levels. Anecdotal reports suggest increased sale of scrap gold to take advantage of the current high prices.
Price outlook
It stands to reason to believe that gold import in the months ahead will gradually pick up from the April low; but on current reckoning, the volume is most unlikely to witness any marked expansion given the price situation. Imports will continue to remain rather low by past standards in India and China both.
So, if the risk-on environment persists and equities continue to improve, gold may lose some of the sheen it has. The metal’s haven demand from investors may wane. Given that the weak physical demand is unlikely to improve anytime soon, that should encourage a price fall in gold as the months roll by. The downside risk to the yellow metal is as much as 10 per cent from the current levels.
The writer is a policy commentator and commodities market specialist. Views are personal.