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Gold prices may witness correction; crude likely to remain choppy: Kotak Securities

Fed’s dovish stance has been factored in so unless there is some surprise from the American central bank, gold could see some correction.

July 29, 2020 / 02:40 PM IST
The bullion metal lost Rs 2,562, or 4.68 percent, for the week on MCX as investors booked profit (Image courtesy: Reuters)

The bullion metal lost Rs 2,562, or 4.68 percent, for the week on MCX as investors booked profit (Image courtesy: Reuters)

Ravindra Rao

Commodities were trading in a narrow range in the international market, tracking mixed trends in equity indices and modest gains in the US dollar.

Comex gold was trading moderately higher near $1,950/oz after gaining 0.7 percent the previous day. Gold had hit a record high of $1,974.7 in intraday trade but dropped to $1,900.2 and closed at $1,944.6.

Gold has rallied sharply in the last few days but the increased volatility shows lack of conviction about sustainability of recent up move unless there are fresh positive triggers.

The mixed trade was amid choppiness in the dollar and position squaring ahead of the Fed meeting. The dollar index managed to end with marginal gains on July 28, as market players positioned for key events, which included Fed decision and US Q2 GDP growth estimate.

Close

However, the US currency was pressurised by mixed economic data, rising virus cases and lack of consensus among US policymakers over additional stimulus measures.

Further cues for the dollar may come from the Fed decision later in the day. The US central bank is expected to keep monetary policy unchanged and the focus will be on its future monetary policy stance as well as economic outlook.

With rising virus cases in the US and reimposition of some restrictions, Fed is likely to maintain a downbeat outlook but this has been factored in. The Fed is also expected to emphasis on keeping the interest rate low for an extended period owing to downbeat outlook.

Amid other factors, gold remains supported by strong investor buying, rising virus cases and increasing US-China tensions. Gold holdings with SPDR ETF rose by 8.47 tonne on July 28 to 1243.12 tonne, the highest since March 2013. However, weighing on gold prices are concerns about consumer demand.

China Gold Association said that the country’s gold consumption fell 38 percent year on year in the first half of 2020 to 323.29 tonne due to coronavirus and a slowing economy.

On July 28, gold price in India surged to a record high above Rs 52,000 per 10 gram, which may further dampen demand.

Gold continues to hold above $1,900, which shows that the momentum is still positive but it now needs a fresh trigger to extend the gains.

The Fed’s dovish stance has been factored in, so unless there is some surprise, gold could see some correction.

NYMEX crude was trading in a narrow range near $41 per barrel after a 1.3 percent decline the previous day. Crude remains range bound amid mixed cues and as market players moved to sidelines ahead of inventory report, FOMC decision and US GDP data.

API weekly report was mixed to positive. API noted a 6.83 million barrels decline in US crude oil stocks as against expectation of a 0.4 mn bbl rise. API however noted an unexpected increase in gasoline and distillate stocks and another rise in crude stocks at Cushing, the delivery terminal for NYMEX crude futures.

Amid other factors, supporting crude and commodities at large is pressure on the dollar and hopes of additional stimulus measures. The focus is on first estimate for Q2 GDP, which will reflect the negative impact from coronavirus restrictions. After EU’s recovery fund, the market is now watching the US, where policymakers are discussing additional stimulus measures.

Weighing on crude price are demand concerns as rising infections have forced countries to impose restrictions and tense US-China ties.

On the supply side, crude is pressurized by higher US stocks and signs of pick up in crude production as evident from the first rise in rig count in 19 weeks. Meanwhile, OPEC and allies are set to reduce the pace of production cuts starting August.

Crude still lacks momentum and is hovering in a narrow range $ 40. Mixed factors may keep price choppy, however, the general bias may be on the downside on signs of improvement in supply.

(The author is VP- Head Commodity Research at Kotak Securities)

Disclaimer: The views and investment tips expressed by experts on moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Moneycontrol Contributor
first published: Jul 29, 2020 02:40 pm

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