Gold bulls roar as virus continues to spread, but caution warranted
With no signs that the virus outbreak could be contained soon and no readily available treatment, risk sentiment is likely to remain weak and this has further boosted the confidence of gold bulls.
February 28, 2020 / 10:39 AM IST
The coronavirus outbreak which has spread much beyond China has caused a major shift from riskier assets to safe havens. Gold has rallied to 7-year high while US 10-year bond yield has dropped to record low level. On the other hand, US DJIA index has slumped over 8 percent from recent highs while economically sensitive commodities have plunged with crude oil testing 1-year low.
The latest leg of rally in gold came in after a large number of virus cases were reported outside China which fueled worries about a widespread pandemic. South Korea, Italy and Iran have become the hot spots out of China while cases have been reported as far as Brazil. With more and more countries reporting virus outbreak, market concerns about health and economic implications have risen and this has caused a scurry towards safe havens. Gold has also benefitted from expectations that central banks may keep monetary policy loose to support their economies.
With no signs that the virus outbreak could be contained soon and no readily available treatment, risk sentiment is likely to remain weak and this has further boosted the confidence of gold bulls. This is also evident from upbeat price forecasts for next six to twelve months. Price looks set to break past the $1,700 per troy ounce level and a break above that could lead to extended gains till $1,780-1,800 range.
So while the flock of bulls is strengthening, it will not be an easy ride for gold. Concerns about consumer demand and extreme positioning indicates possibility of corrective dips.
India and China's share in global demand stands well above 50 percent. As per World Gold Council estimates, China's consumer demand slumped 15 percent in 2019 as higher price and slower growth dented purchases. The country now faces a new challenge in form of the virus outbreak and it is unlikely that economic activity may pick up before second half. So we may see another disappointing year of consumer demand. Indian demand fell 9 percent last year and may remain weak owing to record high prices and no change in import duty. ETF inflows could also slow down at higher prices.
Gold speculators have raised net long position to record high level, as is evident from US CFTC data. While this signals bullish sentiment, it could also cause bouts of profit taking if the virus situation is brought under control.
Gold's performance in comparison to other assets also calls for some caution. Gold crude ratio stands near 34.3 levels, the highest since August 2016 as crude slumped to 1-year low on demand concerns and gold moved higher. US DJIA index and gold ratio stands near 16.3, the lowest since September 2017.
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.