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Fundamentals weak, gold rally may not last long, say analysts

Analysts say the increase in price may not be sustained over the long term as the fundamentals are still weak. The US retail sales data for April has been flat, showing little improvement over the previous month. Coronavirus cases will be a key factor too.

May 18, 2021 / 01:11 PM IST

The current rally in gold is triggered by the continuing weakness in the dollar, inflation worries and the economic data in the US not meeting the expectations. The raging conflict in Gaza has also aided the rise of the yellow metal.

Analysts, however, believe that the increase may not be sustained over the long term as the fundamentals are still weak. The US retail sales data for April released last week was flat showing hardly any improvement over the previous month.

"With the anticipated growth not materialising, the dollar continues to be weak which is the primary reason for the rally. The dollar index has dropped to 90.1 from 91.9 in April. The gold market is also expecting the minutes of the US Federal Reserve meeting that will be released tomorrow. This data is crucial for the economic measures to be taken by the country that could impact the gold market," said Hareesh V, head research, commodities, Geojit Financial Services.

Gold prices increased to a four-month high of $1,870 per ounce on May 18 morning, a rise of around $20 in a day. According to Hareesh, if the price breaches $1,880 per ounce, it could go up to $1,925 per ounce. He, however, doesn't see gold crossing the $2,000-mark. It was in August last that gold price reached a high of $2,072.

Gold touched $1,871 on January 21, 2021 before cooling off. It slipped below $1,700 per ounce in March before rallying again in April as the dollar began to weaken and the second wave of coronavirus shook the world.

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Indian gold prices have also moved up. The 8-gm price of 22-carat gold used for jewellery has breached the Rs 36,000 mark, an increase of over Rs 1,000 since the start beginning of May. This increase is more due to global factors such as muted gold sales with localised lockdowns in several states.

The MCX June contract prices on May 18 stood at Rs 48,374 per 10 gm in the morning, sliding 0.21 percent. This could be due to a slight strengthening of the rupee.

Surendra Mehta, national secretary of Indian Bullion and Jewellers Association, said the fear of inflation in the US and the Israel-Hamas conflict could have stoked gold prices. The US consumer prices rose to 4.2 percent for April, a 13-year high, fuelling concerns of rising inflation.

Prathamesh Mallya, AVP research, commodities and currencies, Angel Broking, said the second coronavirus wave could also be a factor in pushing up gold prices in India. The MCX gold contract could touch Rs 49,000 per ten grams in the coming days.

Other analysts, however, say that the COVID-19 wave had subsided in most of Europe and the US, though it is still a matter of concern in Asian countries. The rapid progress in vaccination drive could push down the gold prices in the medium to long term.

Disclaimer: The views and investment tips expressed by experts on moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
PK Krishnakumar is a journalist based in Kochi.
first published: May 18, 2021 01:11 pm

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