Ravindra Rao
Gold has largely witnessed directionless trend since testing the 2012 highs last month. While global growth worries, loose monetary policy stance of central banks, and steady ETF inflows have kept prices underpinned, general strength in the US dollar and lifting of virus-related restrictions has limited upside. Price is now struggling to hold above $1,700 per troy ounce level.
In the last two weeks, gold has closed thrice below $1,700 an ounce level and all the rebounds have failed to sustain so far.
Gold and US dollar have both been seen as safe-haven assets this year. With easing virus restrictions across the globe, gold seems to have lost its safe-haven appeal but US dollar has continued to rule firm.
The strength in US dollar is not justifiable given the weaker US economic data; Fed’s do it all approach and rising virus cases. US ADP jobs report released Wednesday noted a sharp 20.2 million decline in private-sector jobs in the month of April. US Fed has already cut interest rate to record low levels and has maintained that it is willing to take all possible measures. As per John Hopkins update, virus cases in US have risen to 1.22 million while death toll has jumped to 73,400. US share in total cases and deaths stand at a staggering near 32 percent and 27 percent respectively.
The likely reasoning for the strength in the US dollar is worsening outlook for European and other economies. A spare of disappointing economic data and downbeat growth forecast and uncertainty about European Central Bank’s bond purchases have fueled concerns about health of the economy and pulled euro to near two week low.
On May 5, the German Federal Constitutional Court ruled in a landmark decision that the European Central Bank (ECB)’s current quantitative easing bond purchasing program conflicts with German basic law. The judges warned that if the ECB does not comply with the ruling within three months, the German Bundesbank will be barred from continuing to take part in the ECB’s quantitative easing program.
The European Commission, in its spring economic forecast, noted that euro-zone will see a record decline of 7.75 percent this year, and grow by 6.25 percent in 2021. The 27-nation EU economy is predicted to contract by 7.5 percent this year, before growing about 6 percent in 2021.
The listless trade in last few days shows that gold needs new factors to move out of the $1,675-1,750 per troy ounce range seen for last few days. Unless we see a fresh positive trigger, it is likely to become prone to a major correction. The key factors to look for will be trend in US dollar and virus related restrictions.
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.
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