All eyes are now on the December 15 deadline, when the new US tariffs on Chinese goods are supposed to kick in.
The US-China trade conflict has rattled financial markets for months, but of late, more volatility has been seen as players react to every statement and try to assess the possibility of a truce in the protracted tariff war.
Equity markets fell on November 21 as Reuters reported that trade deal could slide into next year. A day earlier, we did see some improvement in risk sentiment after China's chief negotiator Liu He said he was “cautiously optimistic” about reaching a phase one trade deal with the US, as reported by Bloomberg.
Gold has also been affected by the uncertainty. Gold price slumped to a three-month low earlier in November as encouraging statements from the US and China boosted expectations that a deal was in sight. The metal, however, recovered from the lows, as conflicting signals raised some doubts about a deal.
While the price is off lows, it is still far from the coveted $1,500/oz level and this shows scepticism about price direction.
The biggest hurdle for gold in the near term is the US-China trade dispute. Gold investors are unlikely to flock in until there is even a minute possibility of an agreement. Market players are now eyeing the December 15 deadline when the new US tariffs on Chinese goods come into effect.
Gold’s sluggish price movement and equity market’s outperformance has caused investors to exit the metal. Weakening investor interest is evident from the exchange-traded fund (ETF) outflows as well as a drop in speculative positions.
Based on Bloomberg data, gold holdings with global ETFs stand around 2,295 tonnes, down 40 tonnes from recent highs.
Latest CFTC data shows that non-commercial traders for gold futures cut net long position for the first time in four weeks.
There could be more pain in store for gold investors if the US and China manage to resolve their trade dispute. Open interest for COMEX gold futures stands near record high level of 719,211 contracts and with general uptrend in price this year, most open positions may be on the long side.
So, if we see significant improvement in risk sentiment, investors may exit their bullish bets. ETF outflows could also intensify if investors see better investment options. Despite recent outflows, global ETF gold holdings are still up by about 280 tonnes since the start of the year.
(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.LIVE NOW... Video series on How to Double Your Monthly Income... where Rahul Shah, Ex-Swiss Investment Banker and one of India's leading experts on wealth building, reveals his secret strategies for the first time ever. Register here to watch it for FREE.