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'US dollar, monetary policy & global growth outlook to continue to sway short term outlook of gold'

On the domestic futures market, prices continue to vary inside Rs 49,500-46,400 per ten grams initially and breaking any of the sides would suggest a fresh direction to the commodity.

July 24, 2021 / 12:47 PM IST
Representative Image

Representative Image

Gold traded fragile this week weighed down by a firm US greenback, robust equities and a rebound in the US treasury yields. Concerns over physical market activities in the key Asian countries due to the spread of more virulent Delta variant also cast doubts on the prospects of the commodity.

A swift rebound in US dollar reduced the appeal of gold. US dollar is the benchmark pricing mechanism for gold and hence it is inversely correlated to the US currency.

The Dollar index, which is measured against a basket of six major currencies, had a strong start this year. It rallied about 4 percent in the first quarter but reversed most of such gains by the end of May. However, it recently gained strength by swiftly recuperating from a six-month low.

A strong dollar weighed down the sentiment of other currencies as well. Euro corrected more than 4 percent from five-month high tested in May. Currently, the European currency is placed at a near four-month low.

Dollar firmness pondered the sentiment of Indian Rupee as well. Since the first week of June, rupee corrected from 72.31 to 75.02 a dollar. Meanwhile, a weak domestic currency offered support to local commodity prices.

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An increase in US treasury yields too pondered the sentiment of non-interest yield assets like gold. Hopes that the US Federal Reserve will keep their ultra-low rates to support the economy amid the resurgence of new virus cases, pushed the US treasury yields higher.

Measures taken by central banks to prolong their stimulus will be welcomed by gold. In June, gold has corrected about seven percent on rumours that US Fed will start to taper its massive bond buying program soon. Meanwhile, the recent US report showed a shortfall in growth in employment creation, dispelling expectations for an early monetary tightening.

At the same time, concerns over the new and more virulent Delta variant of Covid-19 in some emerging markets continue to support gold's appeal as a safe asset. The recent sharp rise in new virus cases in India, the second largest consumer of gold, is now under control, but gold's physical market activities are reported to be lacklustre.

Looking ahead, gold prices continue to track the economic crosscurrents which include yield outlook, monetary policy and global growth. Higher bond yields weigh non-yielding gold, as it raises its opportunity cost. The US Fed's policy actions also influence the US greenback directly. A strong US dollar will make gold prices more expensive for holders of other currencies and vice versa.

A rise in new virus cases is putting strain over prospects of a robust economic recovery. This may help gold, as it is often considered as a safe haven during economic and market turmoil. Also, the metal is considered as an important long-term portfolio diversification, may offer extra support to prices.

On the price front, immediate and solid resistance for London spot prices is placed at $1915 an ounce. If prices stay below the same, broad outlook remain choppy with mild negative. However, a direct drop below $1645 is an early signal of short-term liquidation pressure. On the domestic futures market, prices continue to vary inside Rs 49,500-46,400 per ten grams initially and breaking any of the sides would suggest a fresh direction to the commodity.

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.
Hareesh V is the Head of Commodity Research at Geojit Financial Services.
first published: Jul 24, 2021 12:47 pm

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