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Last Updated : Jul 17, 2019 03:39 PM IST | Source: Moneycontrol.com

''Gold may rally further if US-China trade tensions persist'

Year to date, Comex Gold prices have gained 10 percent while MCX gold futures have gained 11.2 percent

Prathamesh Mallya

Gold prices in the international markets have recently made 2013 highs touching around $1,450 an ounce in the international markets. On the MCX, gold futures have been trending higher and made a high of around Rs 35,145 on July 11. Year to date, Comex Gold prices have gained 10 percent while MCX gold futures have gained 11.2 percent.

The yellow metal has finally started reacting as a safe haven for investors across the globe with handsome returns of around 10 percent YTD with global uncertainty and nervousness being at its peak.

Central bankers at the fore again

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The shine in gold prices in the recent times is nothing but a sign of a weak global economy and its bells are ringing in the ears of the central bankers wherein they are required to take necessary actions to put the economy back on track.

In the US, the Federal Reserve Chairman Jerome Powell's dovish remarks have bolstered expectations of an interest rate cut this month. Echoing the dovish sentiment, the minutes from Fed's June policy meeting showed many policymakers thought more stimulus would be needed soon, reinforcing the case for a US interest rate cut in July.

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On the other side, the European Central Bank in its meeting on (June 6) has decided to keep the low-interest rates unchanged at least until mid-2020, and confirmed that it is considering further monetary stimulus, including further rate cuts and restarting the asset purchasing programme, to counter the trade tensions and Brexit uncertainty.

The perils of China's trade war

China's trade surplus with the United States, a major source of friction with its biggest trading partner, rose to $29.92 billion in June from $26.9 billion in May. For the first half of 2019, China's trade surplus with the US rose around 5 percent to $140.48 billion, compared with $133.76 billion in the same period in 2018.

However, China's exports fell in June as the United States ramped up trade pressure, while imports shrank more than expected, pointing to further strains on the world's second-largest economy. China's manufacturers are struggling with sluggish demand at home and abroad, and a sharp US tariff hike announced in May is threatening to crush already-thin profit margins, reinforcing views that Beijing needs to announce more stimulus measures soon. Meanwhile, China's economic growth slowed to 6.2 percent in the second quarter from a year earlier, the weakest pace in at least 27 years.

Weak dollar signals lack of momentum

In 2019, the range for dollar index has been 95 on the lower side and 98 on the higher side. The weakness in the dollar in recent weeks is a clear indication that the US economy is losing steam and the recent actions of the central banks to ease monetary policy further adds fuel to the steam. Meanwhile, US President Donald Trump said China was not living up to promises it made on buying agricultural products from American farmers. Trade disputes amid global growth jitters and a possible interest rate cut are already spooking interest of the traders towards the safe-haven appeal for gold.

Outlook

Comments from Fed Chair Jerome Powell's dovish tone, where he confirmed the US economy was still under threat from disappointing factory activity, tame inflation and a simmering trade war has already built-in momentum in gold. He further said that the Fed stood ready to "act as appropriate".

Markets across the globe will closely watch for the Fed policymakers meet on July 30-31, where investors will look for further cues on monetary policy easing.

If things go out of control with regards to tensions around (US-China) trade talks and geopolitical concerns in the Middle East, the need for gold as a hedge still remains strong. The recent top made in gold stands at around $1438.63 mark and the low stands at $1m382 mark, gold prices will trade in this range for a make or a break situation in the months ahead defining how the global events pare in the midst of weak growth.

On the MCX, gold prices will trade in the range of Rs 35,000 per 10 gram on the higher side and Rs 33,600 per 10 gram on the lower side.

The author is Chief Analyst – Non-Agri Commodities & Currencies at Angel Broking.

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.

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First Published on Jul 17, 2019 03:39 pm
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