Gold rallies on weak dollar, prefer buy on dips: Kotak Securities

COMEX gold trades marginally lower near $1,916/oz after a 0.7% gain on October 5. Gold edged up on October 5 building on the gains noted last week. Gold has rebounded sharply after taking support near $1,850/oz level and close above $1,900/oz has led to extended gains, however, the momentum has slowed amid mixed cues.

Gold’s recent rally has largely been on back of weakness in US dollar. The US dollar index slumped to 2-week low yesterday on reduced safe haven buying amid gains in US equity market. Risk sentiment improved as President Trump returned to the White House on Monday after a three-night hospital stay for treatment for COVID-19 and said he felt "real good", as reported by Reuters.

Progress on stimulus front as talks continued between US House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin also revived risk sentiment. Also weighing on US dollar are concerns about health of US economy amid uneven economic recovery and rising virus cases.

US non-farm payrolls data last week showed a smaller than expected rise in jobs. Meanwhile, states continue to take measures to limit the virus spread dampening economic outlook. The US dollar however gained some support from upbeat US services PMI data and easing worries about health of President Trump.

Rising virus cases in Europe and persisting worries that Brexit transition period may end without a deal has also kept a floor to the US dollar. While gold benefitted from weaker US dollar, improved risk sentiment reduced its safe haven appeal.

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Ravindra Rao

Head - Commodity Research|Kotak Securities

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ETF investors also moved to sidelines after last week’s inflows. Gold holdings with SPDR ETF were unchanged at 1275.604 tonnes. Gold continues to hold above $1900/oz level which shows that the overall momentum is still positive however choppy trade is likely as trend is US dollar will be counterbalanced by general market risk sentiment.

With general focus on US economy and persisting challenges, US dollar is likely to remain under pressure hence we maintain a buy on dips view.

Base metals on LME trade sideways to higher in early trades today after noting mixed movement yesterday. On positive note, lending support to the prices is improvement in global risk appetite as is evident from gains across equity indices along with continuing weakness in US Dollar Index. This improvement in global risk appetite has led to decline in safe haven demand resulting in further weakness in US Dollar Index.

The metals pack may also seek support from hopes of robust demand from top consumer China. The gains may however be capped amid lingering worries due to surging virus cases globally and worries over uneven pace of global recovery.

On virus front, global virus cases continue to rise with fears growing over second wave of infections across European nations and worsening trends across US. Meanwhile on growth front, mixed economic data from major economies like US and Euro Zone continue to fan worries over uneven pace of recovery in global health.

Furthermore, on fundamental front, Copper prices may seek support from lower stocks at SHFE warehouses, decline in copper production from Chile and threat of strike at mine in Chile. As per Reuters report, Chilean copper output fell 6.2% year-on-year in August to 481,700 tonnes. Also, workers union at the Candelaria copper mine in Chile rejected a contract offer from Canada’s Lundin Mining, union officials said on Monday, raising the possibility of a strike (Reuters).

The gains may however be capped amid recent huge build up in stocks at LME warehouses last week along with signs of easing tightness as is evident from LME Cash to three-month spread flipping from backwardation to contango and decline in China’s import premium.
Copper stocks at LME jumped 120% last week while Chinese Yangshan copper import premiums have fallen to around $50 a tonne, the lowest since May 2019, signaling easing demand from China.

In other metals, Zinc prices may seek support from decline in stocks at SHFE warehouses however higher stocks at LME and reports of widening supply surplus may cap the upside.

Lastly in case of Nickel prices may seek support from falling inventories at SHFE warehouses and upbeat demand from China’s stainless steel sector however higher stocks at LME may cap the upside.

For the day, the metals pack may note some gains amid improved risk appetite and weakness in US Dollar however the upside may be capped by caution due to surging virus cases and worries over uneven pace of global recovery.

Further cues may come in from economic data from Euro Zone and comments by central bank officials and its impact on US Dollar.

The Author is VP- Head Commodity Research at Kotak Securities.

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