Direction of gold in short-term will depend on US bond yields, USD, ETF flows trend: Ravindra Rao

Ravindra Rao

After nine weeks of gains and setting multiple new highs during this period, gold prices have turned choppy as market players are trying to assess future outlook.

Spot Gold in the international market surged to record high level of near $2,073 per troy ounce last week, however, failure to breach past the next level of $2,100 led to some correction. Price slumped about 10 percent from the highs in a span of three days and hit a low of near $1,864 before moving back above the $1,900 level the same day.

Gold rallied sharply in a short span of time from the start of July till early August and this pushed price deep into overbought territory making it vulnerable to profit-taking.

Few factors which contributed to gold's decline were stability in the US dollar index after a slide to 2-year low, rebound in US bond yields after nearing record low levels, ETF outflows and signs of progress in vaccine development.

While the sharp sell-off has dented market sentiment, the quick recovery from the lows highlights that market players are still seeing lower prices as a buying opportunity. Outlook for gold is still positive given the increasing challenges to the global economy. Global economic activity has picked up pace after the slump caused by virus-related restrictions, however, a continued rise in virus cases threatens to slow down the pace of recovery. Meanwhile, increased US-China tensions add to challenges for the global economy. The US and other major economies are also likely to continue with monetary and fiscal stimulus measures to boost economic activity.

Gold's incessant rise called for a correction which happened and we may now see choppy trade continuing unless there are fresh triggers. We may see some consolidation near $1,900 level before the next move which could be on the upside.

Gold's breakdown will increase debate about the possibility of such moves going ahead, however, we believe that more correction in gold may come only once the spread of the virus is contained or treatment for COVID-19 which is acknowledged universally comes.

In the short-term, gold's price direction will be largely dependent on trend in US bond yields, US dollar and ETF flows. The rise in US bond yields seems to have taken a pause. The US dollar index has shown some signs of recovery after slumping to a 2-year low, however, we need a quick decision on the US fiscal stimulus package to push the US currency higher. ETF investors are highly price-sensitive so we may see no major activity unless gold resumes its upmove or breaks below the key $1,900 level.

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