Gold delinks from equities as economic optimism strengthens

Representative image

Ravindra Rao

Gold zoomed past the $2,000 per troy ounce earlier this week as the US dollar index slumped to 2018 lows. The metal, however, failed to hold and corrected to trade near $1,950 as the US dollar index bounced back.

The trend in the dollar seems to be directing the movement in gold. The US currency has been on a general downward trend for the last few weeks but we are now seeing signs of revival amid efforts to restart US fiscal stimulus talks.

ECB's concern about euro's strength, mixed economic data and rising virus cases have pressurised the euro while expectations that the new Japanese prime minister may continue with Shinzo Abe's aggressive monetary and fiscal policy has pressurised the Japanese Yen.

While the dollar is showing signs of recovery, it is unlikely to sustain amid the Fed's dovish stance and uneven pace of the economic recovery in that country. Last week, the Fed altered its inflation strategy to highlight that interest rates may remain low for a long time. A number of Fed officials indicated that the central bank needs to do more to support the economy.

US ADP jobs report this week disappointed as it noted a much smaller rise in private sector jobs, however, it was offset by continuing signs of improvement in manufacturing activity. The focus now shifts to key non-farm payrolls data that will determine the further trend in the dollar.

While the dollar is the key price-determining factor, gold is also getting affected by sluggish ETF activity and weaker consumer demand in India and China.

Other development is a general delinking of gold from equity markets. In the last few weeks, we saw both these asset classes moving up as central banks flushed huge liquidity into the market.

While stimulus measures are likely to continue, gold seems to have lost the momentum and equity markets, especially in the US, are testing new highs. This disconnect shows higher confidence that the recovery may continue. Upbeat manufacturing data from major economies has revived market confidence while progress on the vaccine front has also revved risk appetite. A number of researchers have reported progress on vaccine trials while the US is preparing for fast regulatory approval in case of a breakthrough.

Improved risk sentiment has pushed market players from safe havens to riskier assets but there are still numerous challenges, especially the rising virus cases worldwide and this may increase gold’s safe-haven appeal.

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