With increasing risk to Chinese and global economy, there are enough reasons for central banks to continue with record low interest rates and this will continue to support gold price.
If we look at gold's price movement in last few days, it shows a conundrum between increased safe haven buying and reduced consumer demand. While we are seeing a lot of volatility, the range of $1,550-1,600 per troy ounce remains largely intact.
Gold moved closer to $1,600 per ounce as virus outbreak in China dented outlook for Chinese and global economy increasing safe haven allure of the metal. Gold, however, corrected with equal ease as global equity market stabilized and as US dollar index inched up.
Meanwhile, market players also took stock of the fact that lower consumer spending in China will affect gold demand as well. Additionally, Indian demand is also expected to remain weak due to higher price. Price may remain high as the government provided no relief in import duty in the Budget 2020.
The virus outbreak in China is worsening with number of death cases and confirmed cases rising. The restrictions imposed to limit the spread of the virus has begun to hurt Chinese economy and the longer it continues the larger will be the effect on global economy as well.
In a bid to check the virus outbreak, more measures are being taken while researchers are working aggressively to find a treatment. The World Health Organization has also developed a global strategic preparedness and response plan amid the growing threat of the worldwide spread.
Meanwhile, central banks have moved in a bid to support their economies. China's central bank injected 1.7 trillion yuan or $242.74 billion via reverse repos on February 3 and February 4 in order to instill confidence in investors. China's central bank measures helped Chinese equity market to recover from the 8 percent sell-off on Monday.
Amid other central banks, the Bank of Thailand cut interest rate by 0.25 percent to a record low level of 1 percent. The Monetary Authority of Singapore said that the country's current exchange-rate band has enough room to accommodate an easing of the local currency. Brazil central bank also cut rate by 0.25 percent to record low level of 4.25 percent.
The central bank measures have helped ease market nerves leading to a shift back from safe haven assets to riskier assets, however, monetary easing measures are supportive for gold as well. With increasing risk to Chinese and global economy, there are enough reasons for central banks to continue with record low interest rates and this will continue to support gold price.
(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.
Exclusive offer: Use code "BUDGET2020" and get Moneycontrol Pro's Subscription for as little as Rs 333/- for the first year.