The broad outlook of gold remains positive, but chances of an immediate correction is on the cards.
Gold dropped to its lowest level since December. Upbeat global economic releases, showing signs of a bounce back in economic growth momentum, took the sheen of gold’s safe-haven appeal, prompting investors to bet on riskier assets.
A positive US greenback and hopes of an imminent agreement on the trade dispute between the world’s two largest economies, the US and China, also assisted the sentiments.
Currently, spot gold is poised to post its fourth straight week of decline this holiday-shortened week. Spot prices in the key London spot market have lost more than five percent since hitting a ten month-high of $1,346 a troy ounce in February. Domestic futures market too traded down, but a feeble domestic currency limited sharp liquidation.
Apprehensions over slow global growth forecast and an ongoing trade dispute between the US and China had lifted gold’s safe-haven appeal earlier.
Expectations of bleaker economic prospects and delay in hiking of US interest rates, which eased down dollar’s appeal, assisted the yellow metal's prices earlier. The nine months old US and China trade battle has roiled the global supply chain and darkened the world economic outlook.
Earlier, IMF reduced their global growth forecast to 3.3 percent cutting down 20 basis points from its January forecast of 3.5 percent. This is the lowest expansion since January 2016. The agency also hints that the growth rate would ease further due to tariff tensions and the UK’s potentially disorderly exit from the European Union.
Gold’s demand historically has been positively correlated to economic growth. A string of positive economic indications from the US and China, as well as hopes that both countries are close to an agreement on the trade deal, have moderated worries about global economic growth prospect.
Positive equity markets, especially Asian shares, which have remained close to nine-month highs, are prompting investors to bet on riskier assets like equities.
Defying hopes of further weakness, Chinese economy surprisingly grew at a steady pace in the first quarter of 2019. China has reported a GDP growth of 6.4 percent against the expectation of 6.3 percent in the last quarter.
However, there were reports that the Chinese economy would grow close to a 30-year low of 6.2 percent this year due to a weak demand outlook and activities weighed down by trade war worries.
Retail sales and industrial production data from the country also recorded positive growth. Fiscal stimulus plan by spending billions of dollars in the form of additional tax cuts and infrastructure spending by the government aided to uplift the economy. Anyhow, the sudden jump in growth numbers is too early to predict a substantial recovery in economic activity.
Upbeat US economic data and a steady dollar too weighed the sentiments of the yellow metal. Trade deficit data from the US fell to multi-month lows in February due to defying imports from China, temporarily providing a boost to the economy.
At the same time, investment interest on gold remains low with the holdings of S&P Depository Receipts (SPDR), the world’s largest gold-backed exchange traded fund, are at their lowest level since last October.
The structural economic reforms in emerging markets, especially in China and India and more central bank purchases are likely to prop up gold’s physical demand later.
On the price front, the broad outlook of gold remains positive, but the chances of an immediate correction are on the cards. As long as prices stay below $1,300 the weak sentiments may continue to $1,260 or even till $1,242 levels later.
However, a swift turnaround is possible once it breaks above $1,310.
In the domestic market, local currency fluctuations and upcoming general election results would guide the direction of the precious metal.The author is Commodity Research Head at Geojit Financial Services.