The general bias may be on the downside for gold unless we see a major correction in equity markets.
COMEX gold trades moderately higher near USD 1,690/oz after a sharp 2.6 percent decline in previous session. Gold inched up amid some dip buying as price managed to hold near the key USD 1,680/oz level. Also supporting price is US-China tensions, continuing protests in US, stimulus measures by central banks and governments along with rising virus cases globally.
Mixed Chinese trade and Japanese GDP data also shows challenges to major economies. Japan’s GDP was revised from -0.9 percent to -0.6 percent as against forecast of -0.5 percent.
China’s trade surplus widened, however, sharp drop in imports shows weaker demand for commodities. However, weighing on gold price is upbeat US non-farm payrolls data which has given further boost to US and global equity markets which were already rallying on expectations that lifting of virus related restrictions and stimulus measures may revive growth.
The US economy unexpectedly added 2.509 million jobs in May after suffering record losses in the prior month. Optimism about US economy also brought a halt to recent losses in US dollar, however, the US currency remains under pressure by reduced safe haven buying.
ETF outflows also shows weakening investor interest amid improving global outlook. Gold holdings with SPDR ETF fell by 4.09 tonnes to 1128.11 tonnes, second consecutive decline. Holdings with the fund hit April 2013 high earlier last week. Gold may continue to witness choppy trade as market players assess persisting risks in form of rising virus cases, uneven economic recovery and geopolitical issues against prospect of economic activity picking up. However, the general bias may be on the downside unless we see a major correction in equity markets.
Most Base metals on LME, barring Aluminum, trade with a weaker bias in early trades today after witnessing sharp rally last week. On weaker note weighing on the prices is profit taking as the recent rally across metals pack seems overdone. Also weighing on the prices is doubts over future demand especially from major consumer China and US amid lingering US-China tensions and ongoing protests in US.
The downside may, however, be capped amid upbeat risk appetite as is evident from sharp gains in global equity indices tracking optimism over reopening of global economies along with expectation of more stimulus by major economies to spur growth and weakness in US Dollar. Further cues may come in from economic data from Euro Zone along with comments by ECB Chief Lagarde and its impact on US Dollar.
Also focus may continue to be on virus related development along with development over US-China tensions, unrest in US and comments by central bank and its impact on movement in US Dollar as well as global sentiment.
NYMEX crude surged more than 2 percent to hit a session high of USD 40.44/bbl today, the highest level since March 6, but has retreated to trade near USD 39.5/bbl. Crude corrected amid some profit taking after rally to fresh three month highs above the key USD 40/bbl level. Weighing on price are concerns that higher price may reduce the pace of production cuts.
As per Rystad Energy estimates “a bit more than 300,000 bpd” of shut in US oil production has come back online due to sharp rebound in price. Also weighing on price are easing supply concerns relating to Libya. Meanwhile, market players are also trying to assess OPEC’s production cut deal. OPEC and allies held a video-conference on Saturday and decided to extend the current deeper production cuts by a month.
OPEC’s April deal called for 9.7 million barrels per day production cut in May and June followed by a reduced cut of 7.7 mn bpd from July onwards. The group has now decided to extend the current 9.7 million bpd to July. Mexico has however refrained from extending the cuts so actual cut in July may be 9.6 million bpd.
Meanwhile, the deal also calls for all the nations who have not complied fully to the deal so far to compensate for in the months of July, August and September.
OPEC’s production cut extension is positive for crude price but largely expected. The one month extension and the regular review show uncertainty about compliance by some countries. Meanwhile, the small extension also shows that the group does not want to continue with deeper production cuts for long given the pickup in economic activity. However, supporting crude price is optimism about US economy amid upbeat non-farm payrolls data. Also supporting crude price are supply disruption caused by storm activity in Atlantic.
Decline in US crude oil rig count also shows weaker production interest. The number of rigs drilling for crude fell by 16 to 206 rigs, lowest since June 2009. Crude oil has turned choppy after break above USD 40/bbl and as OPEC’s decision was largely expected it is better to wait for a corrective dip to enter into long positions.
The author is VP- Head Commodity Research at Kotak SecuritiesDisclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.