With general upward momentum in gold and industrial metals, silver could see some extended gains with next resistance near $24/oz levels
Ravindra Rao
COMEX gold trades higher near $1,860/oz and has hit a high of $1,866.8/oz, a level not seen since September 2011. After days of consolidation near the $1,800/oz level, gold broke past the $1,830/oz level resulting in extended gains. The rally has been supported by a weaker dollar, robust exchange-traded fund (ETF) buying and signs of additional stimulus measures.
The dollar index trades near the lowest level since March, weighed down by reduced safe haven buying. Euro has risen sharply against the dollar amid hopes that EU recovery fund may boost economic recovery and amid diverging virus situation in US and Europe.
Gold ETF investors have continued to invest in the metal amid hopes that huge stimulus measures may cause inflationary pressure and currency devaluation pushing prices substantially higher. Gold holdings with SPDR ETF rose by 7.89 tonne to 1219.746 tonne on July 21, the highest level since March 2013. Gold along with other commodities and equity markets rallied yesterday as EU leaders came to an agreement over the proposed recovery fund.
The European Union reached an agreement on a 750 billion euro coronavirus rescue fund which comprises of 390 billion euro in grants and the remainder in loans as a part of a compromise with Denmark, Sweden, Austria and the Netherlands, which had been reluctant to push for a larger package of funds via grants. The leaders also agreed on a multi-year EU budget of over 1 trillion euro that will run from next year to 2027 (MarketWatch report).
Meanwhile, discussions have begun in US on a new stimulus plan to support the economy. Amid other factors, gold is also supported by increasing virus cases globally and increased tensions between US-China and China and other nations which may increase challenges for global economy. While gold has managed to gain along with other asset classes, a sustained rise in equity market could reduce incentive to invest in gold. The yellow metal may continue to trade with a positive bias amid general weakness in dollar and continuing stimulus measures to boost economic recovery however strength in equity markets calls for some caution.
COMEX silver has surged over 5 percent to trade near $22.7/oz and has hit a session high of $23.19/oz, the highest level since September 2013. Silver rallied sharply on July 22 adding to July21 sharp 6.8 percent rally. Silver has rallied sharply amid concurrent gains in gold and industrial metals. Gold has risen to 2011 highs amid weaker dollar and additional stimulus measures. Improved risk sentiment and weaker dollar has benefitted industrial metals as well. Also supporting silver price is huge investor inflows. Silver holdings with iShares ETF rose by a sharp 478 tonne, or 2.9 percent, on July 21 to 16,857.08 tonne, a record high. The sharp rise in silver price has pulled the gold-to-silver ratio to 83 levels, the lowest since October 2019.
Silver was the underperformer for most part of the year but has seen a sharp rise in last few days owing to strong investor inflows. With general upward momentum in gold and industrial metals, silver could see some extended gains with next resistance near $24/oz level. Focus may continue to be on US economic data and development relating to virus outbreak, US-China tensions and stimulus plans which may affect dollar as well as general risk sentiment and thereby the trend in bullion.
NYMEX crude trades moderately lower near $41.5/bbl after a 2.8 percent gain on July 21. After days of consolidation, crude oil breached the pivotal $42/bbl level for the first time since March. Crude along with other commodities rallied sharply on signs of additional stimulus measures as well as progress in vaccine testing for COVID-19.
The European Union leaders on July 21 managed to come to consensus on the 750 billion euro recovery fund which will allow the European Commission to raise billions of euro on capital markets on behalf of all 27 states (Reuters). Meanwhile, discussions have begun in US on a new stimulus plan to support the economy. A number of companies have reported progress in their vaccine trials and this has helped ease market nerves to some extent. However, there is still uncertainty when a treatment could be found.
Crude oil weakened on July 22 amid mixed API report. API noted a 7.54 million barrels increase in US crude oil stocks as against forecast of a 1.95 million barrel decline while stocks at Cushing, the delivery terminal for NYMEX crude futures, rose by 0.716 million bbl. API noted a bigger than expected decline in gasoline and distillate stocks. The report rekindles worries about well supplied US market and slow pickup in demand. Also weighing on price is OPEC’s decision to reduce the pace of production cuts starting August, which will increase global supply.
As per an Arab news article, citing Refinitiv data, southern Iraqi exports in the first 20 days of July averaged 2.70 million barrels per day, unchanged from June’s figures for exports from southern Iraq. The July figures show that Iraq is still not complying fully with the agreed production cuts. Also weighing on price is rising coronavirus cases globally and especially in US, which has forced authorities to re-impose some restrictions hampering economic activity.
Economic data shows improvement from the slump caused by virus outbreak. However, the pace remains uneven. Adding to challenges for global economy is increased tensions between US-China and China and other countries. Crude oil may trade sideways to negative ahead of inventory report on July 22 as market focus shifts from general upbeat risk sentiment to well supplied US market. Apart from stocks, focus will be on US crude production and refinery demand. US crude production has steadied in last few weeks indicating weakening interest in output cuts.
The author is VP- Head Commodity Research at Kotak Securities