While gold is struggling for direction, prices remain supported by increasing virus cases which has forced countries to take restrictive measures threatening economic recovery.
Ravindra Rao
COMEX gold trades over 1 percent lower near $1,947/oz after a 2.1 percent decline yesterday. Gold rallied sharply in last few sessions, however, the rally petered out after failing to sustain above the key $2,000/oz level. Lack of any fresh positive triggers also caused investors to exit the metal.
The US dollar index which slumped to May 2018 lows saw a sharp rebound yesterday amid lack of fresh cues from US Federal Reserve. FOMC minutes noted that the central bank is downbeat on growth outlook giving COVID-19 uncertainty and sees the need for additional fiscal stimulus to support the economy, however, no new policy action was discussed. There have been talks that the central bank could consider capping yields to reinforce its guidance that interest rate may remain low for a long time. Lack of fresh investor inflows also weighed on gold.
Gold holdings with SPDR ETF were unchanged for a second day yesterday at 1252.378 tonnes. Meanwhile, consumer demand remained weak as is evident from the discount in the Chinese and Indian market. While gold is struggling for direction, prices was supported by increasing virus cases which has forced countries to take restrictive measures threatening economic recovery.
Increased US-China tensions have also supported gold prices. Gold’s sharp rebound from recent lows convinced market players that the recent upward momentum is still intact, however, we are likely to see a lot of volatility unless there are fresh triggers. For the day, we may see choppy trade as market players assess Fed’s stance and its impact on US dollar, however, we may see buying interest emerging at lower levels amid persisting challenges to the US and global economy and a general weaker outlook for US dollar.
Base metals on LME trade with a weaker bias today retreating from yesterday’s sharp gains. Putting pressure on the prices is rebound in US Dollar Index and global risk aversion as is evident from retreat across equity indices post Fed’s meeting minutes.
Sentiments have soured and US Dollar has bounced off the May 2018 lows hit on Tuesday after the minutes of US Fed meeting gave few clues about whether an even more dovish shift in its policy framework is possible in the autumn, disappointing some dollar bears. Meanwhile, on growth front the confidence has been knocked off after the central bank warned the US economy faced a highly uncertain path to recovery from the coronavirus-induced downturn.
Furthermore, denting market sentiments is the ongoing political wrangling over additional stimulus in the US. Prices may further come under pressure amid simmering US-China tensions along with a steady rise in virus cases globally which, in turn, threatens to derail the nascent recovery in global health. The downside may, however, be capped amid demand optimism especially from top consumer China along with signs of progress on the virus treatment front.
On the demand front, recent spate of mixed to positive data specifically from top consumer China along with improvement in global manufacturing indices is signalling a recovery in economic activity. The metals pack may trade sideways to lower today weighed down by recovery in US dollar and global risk aversion. The downside may, however, fail to sustain if Dollar Index struggles to buildup on the recent rebound. Further cues may come in from the US and European data along with ECB meeting minutes and its impact on the dollar.
The author is VP- Head Commodity Research at Kotak Securities
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