Gold likely to witness buying at lower levels amid concerns in US economy: Kotak Securities

COMEX gold trades lower near USD 1880/oz after a 0.2 percent decline yesterday. Gold slumped to August lows earlier this week but price has so far managed to close above the key USD 1900/oz level. It is likely that we may see some consolidation between USD 1860-$1900/oz level until there are fresh cues.

Weighing on gold price is persistent strength in US dollar index which has tested the highest level since late July. The US dollar has edged up amid increasing concerns about health of European economies amid rising virus cases, mixed economic data and Brexit uncertainty. As per Bloomberg report, British Prime Minister Boris Johnson announced new restrictions that are likely to last six months and told people to work from home if possible.

The US dollar has edged up also as Fed continues to emphasize on need for additional fiscal stimulus which indicates that monetary measures are not being considered. While US dollar is being seen as the preferred safe haven asset, outlook for US currency remains mired by uneven economic recovery, delay in fiscal stimulus and Fed’s downbeat growth outlook.

Fed Chairman Jerome Powell said the economy has a long way to go before fully recovering and will need further support, as per Reuters report. While firmness in US dollar has pressurized gold prices, increasing virus spread and global economic concerns has increased gold’s safe haven appeal. ETF investors chose the recent fall in gold price as a buying opportunity.

Gold holdings with SPDR ETF hit the highest level since Feb 2013 on Monday but fell marginally by 0.6 ton to 1278.233 tonnes. Gold’s sharp fall earlier this week has dented market sentiment and while positive factors persists a sustained rise may not come until there is a major correction in US dollar. We expect choppy trade but buying might emerge at lower levels as upside in US dollar may be restricted on concerns about health of US economy.

NYMEX crude trades modestly lower near USD 39.6/bbl after a 0.7 percent gain yesterday. Crude fell sharply earlier this week as part of sell-off across commodities and equities but price managed to hold above USD 38/bbl level and edge up. Crude recovered from the lows as equity markets stabilized. However, weighing on market sentiment was persisting worries about tighter restrictions in Europe amid rising virus cases, delay in US stimulus deal, uneven global economic recovery, Fed’s downbeat growth outlook, increased US-China tensions and Brexit uncertainty.

The US dollar index held on to its gains amid increasing concerns about health of European economies and as Fed continued to emphasize on need of additional fiscal stimulus. Crude weakened today amid mixed API weekly report. API noted a 0.691 million barrels increase in US crude oil stocks as against expectations of a 2.3 million barrels decline. API however also noted a bigger than expected decline in gasoline stocks and an unexpected fall in distillate stocks.

Amid other factors, support from OPEC’s willingness to take additional measures is countered by prospect of higher output from Libya. Storm activity in Atlantic also subsided as Beta weakened to tropical depression after landfall near Texas.

As per US BSEE, about 7.12 percent of crude production in Gulf of Mexico was shut as of September 22 as against 8.36 percent a day earlier. Crude oil may remain sideways to lower today ahead of inventory report as API report has fueled expectations of an increase in US crude oil stocks. Risk sentiment expected to remain fragile amid increasing challenges to global economy.

Focus may shift today to manufacturing data from Europe and US. Manufacturing sector has been showing signs of improvement and if this trend continues we may see some improvement in risk sentiment which will be positive for commodities at large.

The author is VP- Head Commodity Research at Kotak Securities