Overall, gold has enough ammunition to test fresh all-time highs but it may not come if equity markets continue to outperform.
Gold market players have been optimistic about the metal ever since the pandemic broke and central banks started taking aggressive measures with most expecting new highs to be set soon.
After weeks of consolidation in the $1,680-1,750 per troy ounce range, gold finally broke past the $1,800 an ounce level this week for the first time since 2011. The breakout should reinvigorate the bulls however caution is evident from the sudden moves in both directions.
Gold rallied sharply earlier this week amid rising virus concerns and despite persisting strength in equity markets, signs of weaker consumer demand and lack of fresh ETF inflows. This shows that the up move could be partly due to position squaring near month and quarter ending. Gold reported its best quarterly gain in over four years. The US DJIA index marked its best quarter since 1987.
Just a day later, gold rises to fresh 2011 highs but failed to hold and slumped back to $1,780 level. The sell-off came on back of some upbeat economic readings and progress in vaccine development and even as virus cases in the US surged at record pace, US-China tensions intensified and as ETF investors inflows picked up.
Gold's positive correlation with equity markets is not unusual as the flush of liquidity in financial markets, pushed in by central banks to support their economies, is chasing all asset classes. However, it is unlikely that this could continue for long.
Currently, market players are focusing on virus-related developments. Global cases have been rising but lately we have seen resurgence in cases in countries like US, China, Australia etc. who had some control over the situation. The jump in virus cases has caused some countries to put restrictive measures while some US states have rolled back reopening plans.
If the situation continues to worsen, countries may be forced to take restrictive measures which may hamper the nascent economic recovery and force central banks and governments to intensify stimulus measures. This is the major reason which has kept gold prices underpinned. However, the general strength in equity markets shows that market players are hopeful that countries may want to avoid severe restrictions to keep economic activity ticking. Once this conundrum is broken we may get more clarity on price direction for gold and equity markets.
Currently, we are seeing that countries are imposing restrictive measures which are more localised in nature and this has kept market players hopeful that lockdowns may not take place. However, this situation could change soon if the virus outbreak intensifies further. Overall, gold has enough ammunition to test fresh all-time highs but it may not come if equity markets continue to outperform.
The author is VP - Head Commodity Research at Kotak Securities.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.