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Gold sentiment likely to remain positive until virus outbreak is controlled

Persisting risks from the virus cases may cause central banks and governments to continue with their stimulus measures and this may also support gold prices.

June 29, 2020 / 06:02 PM IST

Ravindra Rao

After weeks of consolidation in the $1,680-1,750 range, gold finally got some momentum last week and tested the highest level since 2011. It, however, failed to test the key $1,800 per ounce level and we saw a follow through correction.

Gold rallied sharply on safe-haven buying as market players got worried about rising virus cases, weaker growth outlook and growing trade tensions between US-China and US-EU. As they assessed increasing risks to the global economy, they chose the safety of the US dollar, leading to a correction in the dollar-denominated gold prices.

A similar move was seen in early March when gold broke past $1,700 for the first time since 2012 but within two weeks it slumped to $1,450.

Gold rallied in early March as the virus spread quickly out of China to other countries. However, as the virus spread intensified and market players saw major risks to the global economy, they chose cash and this led to a correction in gold prices. The US dollar index surged to January 2017 highs in March, which reflects its increased appeal as a safe-haven asset.

While gold may continue to remain volatile amid trade-off between safe-haven buying and a stronger dollar, overall sentiment may remain positive unless the virus outbreak is controlled or we see a significant pickup in economic recovery.

While viral cases have been on a rise and have now surpassed the 1-crore mark, market players have become nervous lately because of a fresh surge in infections in places like China, South Korea, Japan and the US, which had some control over the situation.

The fresh spike has come as countries reopen their economies. The resurgence in cases is being seen as a red flag that rushed reopening could be counterproductive. Countries are lifting restrictions to boost growth but if cases continue to surge, they may be forced to go slow on reopening or even impose fresh restrictions, leading to a further slump in economic activity.

Persisting virus risk may force central banks and governments to continue stimulus measures and this may also support gold prices. The European Union is already discussing a 750-billion euro recovery fund, while the US is considering a $1-trillion infrastructure plan to boost economic activity.

The author is VP - Head Commodity Research at Kotak Securities.

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Moneycontrol Contributor
Moneycontrol Contributor
first published: Jun 29, 2020 06:02 pm