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Gold stuck in a trade-off between safe haven demand and consumer buying

Industry players are asking for a cut in customs duty from current 12.5 percent to boost sales and jewellery exports.

January 31, 2020 / 12:26 PM IST

Ravindra Rao

Gold started the week on a promising note and went on to hit a near 3-week high of $1,588 per troy ounce however the momentum weakened and price dipped back towards $1,565 an ounce before bouncing back to trade near $1,580 an ounce on January 30.

The mixed trade is due to contrarian factors at work. The virus outbreak in China and dovish stance of major central banks has continued to support however weaker consumer demand has kept a check on upside.

The biggest factor affecting commodities market at present is effect of the virus outbreak on Chinese demand. China has increased efforts to restrict the spread of the virus however there are still no signs of containment with death toll increasing to 170 in China and more than 7,700 confirmed cases. World Health Organization is considering declaring the outbreak a global emergency.

The virus outbreak has become a major health emergency for China and also threatens to affect economic activity. An economist at the Chinese Academy of social sciences believes that China's first-quarter GDP growth rate may drop to 5 percent or even lower due to the coronavirus outbreak.

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Fed Chairman Jerome Powell, in the press conference post monetary policy meeting on Wednesday, said that the outbreak of the coronavirus will likely hit the Chinese economy and could spill wider, but it was too early to judge what impact it would have on the US.

The US central bank kept interest rate unchanged but expressed concerns about inflation and risk from virus outbreak and this fueled expectation that the central bank could tilt towards a rate cut. Bank of England is also inching towards a rate cut to support the economy while ECB has maintained downside risks to the economy making a case for loose monetary policy.

The virus outbreak in China has brought the economy to a standstill and this threatens to further slowdown the consumer demand. The Lunar New Year is usually a high demand period when gold is gifted. With many cities in lockdown, travel restrictions in place and cancellation of festivities, gold sales are likely to be hit.

As per World Gold Council data, China’s gold consumer demand fell 15 percent to about 848 tonnes in 2019, the lowest since 2011. Higher price and slowdown in economic activity dented demand. If the virus outbreak is not contained soon and has a major negative effect on Chinese economy, it may further reduce consumer demand.

Indian gold buying has also slowed down due to near record high price, higher duties and slower economic growth. In the near term, market players are looking at the Union Budget of India. Industry players are asking for a cut in customs duty from current 12.5 percent to boost sales and jewellery exports. While a duty cut looks dim, any move by the government on that front may be positive for demand.

(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.
Moneycontrol Contributor
first published: Jan 31, 2020 12:26 pm

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