Gold may continue to trade with a positive bias as market players reassess the possibility of fresh restrictions following a spike in coronavirus cases.
Comex gold gained more than 1 percent to trade above $ 1,770/oz after a 1.2 percent gain in the previous session. Gold has been trading in a broad range of $1,680-1,750 for the last few weeks, however, a break and close above $ 1,750 led to extended gains.
Gold has benefitted from safe-haven buying amid increasing concerns that rising virus cases worldwide may force nations to re-impose sanctions, hurting economic activity. Also weighing on market sentiment is the US-China trade dispute. A report by Bloomberg on June 19 said China plans to accelerate purchases of American farm goods to comply with the phase one trade deal signed in January.
Reuters reported that President Donald Trump held off Xinjiang sanctions due to trade talks. Market concerns however rose as China suspended poultry imports from Tyson Foods after coronavirus cases at Arkansas plant, Bloomberg said.
Also supporting price is a bleak growth outlook and expectations of additional stimulus by central banks and governments. On June 19, Boston Fed President Eric Rosengren cautioned that the US economy wasn’t likely to have a fast recovery and more support would be needed from the Fed and Congress.
Over the weekend, China released details of a proposed national security law that would give mainland the right to directly prosecute Hong Kong residents for still vaguely defined offences, as reported by Bloomberg.
China is also at loggerheads with Australia, EU and US over handling of the virus outbreak. India-China tensions are also high after recent deadly clash along the Line of Actual Control (LAC).
ETF inflows also show robust investor interest. Gold holdings with SPDR ETF rose by 23.09 tonnes to 1159.31 tonnes, highest since April 2013 and biggest one-day rise since June 2019. Gold may continue to trade with a positive bias, as market players reassess the possibility of fresh restrictions following a spike in coronavirus cases.
NYMEX crude traded unchanged $40/bbl after a 2 percent gain in the previous session. Crude has rebounded sharply after taking support near $34 and has now turned choppy near the key $ 40 level. We are seeing choppy trade partially due to position squaring ahead of expiration of July contract and also as market players assess implication of crude prices above $40.
There is an increasing debate that recovery in price may result in some US production coming back online. The slower drop in US crude oil rig count also shows that the production cut may slow down. The number of rigs drilling for crude oil fell by 10 to 189 rigs last week, lowest since June 2009. The average decline for last 14 weeks has been around 35 rigs.
US crude stocks are at a record high despite aggressive cuts and some recovery in demand. Crude price rallied sharply last week after OPEC’s monitoring committee noted that the group is working on improving compliance with the production cuts and Iraq and Kazakhstan have already submitted their schedule to compensate for lower compliance in the last few weeks.
However, there is uncertainty whether the group may extend the deeper cuts beyond July. Russian Energy Minister Alexander Novak said on June 20 that Russia didn’t see a need to deepen cuts under the OPEC+ agreement, but the group would continue to discuss the situation monthly.
On demand side, global economies continue to ease virus-related restrictions and economic activity continues to pick up and this has boosted demand expectations. However, mixed economic data and weaker outlook highlight that the economic recovery will be at a slow pace and so will be the demand.
Also weighing on market sentiment are concerns that rising virus cases may force countries to re-impose restrictions. The World Health Organization has said the coronavirus pandemic has entered a “new and dangerous phase.” Amid other factors, geopolitical issues and US-China tensions are also a cause of concern.
Crude oil may witness choppy trade with price near the key $ 40 level.
(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.