Weak US dollar likely to support metal prices, stay cautious on gold: Kotak Securities

Gold has bounced back sharply from recent lows indicating buying interest in the market, however, some caution is required as volatility in US dollar index may subside with the market's focus shifting from Fed to other issues.

August 31, 2020 / 03:17 PM IST

Ravindra Rao

COMEX gold trades marginally higher near $1,978/oz after a 1.4 percent gain last week. Gold witnessed sharp volatility last week but price managed to take support near $1,900/oz level before bouncing back.

Gold’s rally was supported by weakness in the US dollar. The US dollar came under renewed pressure as market players assessed US Federal Reserve's move to alter its inflation strategy. Fed decided to target 2 percent inflation on an average level which means that the central bank could let inflation run higher for some time and may not pre-emptively raise interest rate to control inflation. The shift in stance is to indicate that interest rates may remain low for a long time.

Fed’s stance is negative for the US dollar and positive for gold, however, the central bank did not give much detail on how it will achieve the 2 percent target. Meanwhile, the Fed’s stance of keeping interest rate low for a long time was not a surprise for market players as the central bank has been emphasising on the same. The Japanese Yen rallied sharply against the US dollar on Friday as market players assessed the impact of Prime Minister Shinzo Abe stepping down due to health reasons. Yen may stabilise soon once there is more clarity on who will succeed Abe.

Gold is also supported by rising virus cases globally and renewed worries about US-China tensions. Rising virus cases globally has raised doubts about the sustainability of the recent economic recovery. US-China tensions have cast a cloud over trade deal even as both sides remain committed to meet their obligations. However, weighing on the gold price is mixed ETF activity and weaker consumer demand.

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Gold holdings with SPDR ETF were unchanged Friday at 1251.502 tonne despite a 2 percent rally in price. As per Reuters reports, dealers in India offered the highest discounts on gold in five months last week as a dip in domestic prices failed to revive demand. Continuing strength in equity markets is a sign of its focus on possible economic recovery and vaccine development.

Gold has bounced back sharply from recent lows indicating buying interest in the market, however, some caution is required as volatility in US dollar index may subside with the market's focus shifting from Fed to other issues.

Base metals on MCX may witness range-bound movement today amid lack of cues from the international exchange as LME is closed today on account of Spring Bank Holiday. The metals pack, baring Lead, continued to trend higher last week with LME Nickel ending 4.6 percent higher followed by 2.7 percent rally in Copper prices and 2.4 percent and 2 percent jump in Zinc and Aluminium prices respectively.

For the day the bias may continue to be positive as the metals pack continues to seek support from weakness in the US Dollar Index along with gains in global equity indices. US Dollar Index trades little changed but at 92.35 hovers near May 2018 lows amid Fed’s dovish stance along with worries that economic recovery in the US may underperform its global peers. Meanwhile, equity indices trade with a positive bias amid hopes of record monetary as well as the fiscal stimulus, to boost growth.

Furthermore, also lending support to the metals is demand optimism especially from top consumer China. A recent spate of positive data from China along with improvement in global factory activity continues to fan demand outlook for base metals. The data from China showed that factory activity expanded at a slightly slower pace in August but at 51, remained above the 50-point mark that separates growth from contraction. The gains may, however, be capped amid simmering US-China tensions along with a surge in coronavirus cases globally.

Meanwhile, on fundamental front, Copper prices may continue to seek support from dwindling stocks at LME along with signs of tightness in the physical market as is evident from widening backwardation between LME Cash to three months. Copper stocks at LME fell by 14,125 tonnes last week hitting the lowest level since 2006, while those at SHFE fell by 2,180 tonnes. In case of Nickel, prices may seek support from upbeat demand from China’s stainless steel sector along with worries over lower supplies from Philippines. However, higher stocks at both LME and SHFE warehouses may cap the upside.

Nickel stocks at LME rose by modest 24 tonnes last week while those at SHFE fell by 786 tonne. Overall the metals pack may witness range-bound movement amid lack of cues from LME; however, bias for most metals may be positive. With no major economic data due today, the focus may continue to be on virus-related developments, US-China tussel and US stimulus discussion and its impact on the movement in US Dollar as well as the global sentiment.

The author is VP- Head Commodity Research at Kotak Securities

Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.​
Ravindra Rao Ravindra V Rao is the Head - Commodity Research at Kotak Securities.
first published: Aug 31, 2020 03:17 pm

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