Weak global economic sentiments, escalating global tensions may continue to lift gold higher

Hareesh V

As an ultimate store of value, gold has performed well since the start of 2020. Increased demand for safe assets on concerns over economic slowdown after the global outbreak of coronavirus supported the metal. Large scale fiscal stimulus measures taken by various global central banks, weak US dollar and escalating geopolitical tensions also lifted the yellow metal higher.

Gold prices in the domestic futures market are currently hovering near record highs. Prices of MCX futures started this year at Rs 39,108 per ten grams. However, it gained considerably by more than 24 percent to hit an all-time peak of Rs 48,982 by the end of June. Though physical market activities were limited, high overseas prices and a weak INR supported the metal's trend in the domestic market.

In the meantime, spot gold in the key London market rallied to a near eight-year high. Prices constantly gained from the January levels of $1,516 an ounce to $1,788 in the first half of the year. It surged more than 17 percent during this period.

Gold is considered a safe investment during periods of economic and political uncertainty. The negative impact of coronavirus hit the global economy adversely causing investors to park money in gold. There are worries that the global economy may be facing its worst slump since the 1930s recession. Major economic data releases from the United States and other key economies show that the economies are passing through the declining growth phase, to lows last seen during the financial crisis, hinting that the global economy is extremely turbulent.

Escalating geopolitical tensions also prompted investors to rush into the safety of the yellow metal. India and China border clashes and chaos between North and South Korea are raising fresh hostilities between countries. Risk aversion due to issues in Hong Kong and worsening relation between US and China shifted investor focus to the yellow metal.

As policymakers scramble to support the economic blow caused by the prolonged lockdowns, central banks across the world have initiated several stimulus programs. The Central Banks' economic easing measures have historically lifted investors' appetite for gold.

A weak dollar also supports the trend. US dollar has lost considerably from its March highs. As bullion is traditionally priced in dollars, a decline in US currency will push gold rates higher.

Looking ahead, gold continues to edge higher as the commodity is considered a safe store of value during times of political and financial instability. The ongoing tensions on the economy and geopolitical worries might not be drawing to an end soon that may further support the metal.

Meanwhile a sudden economic turnaround or a rally in the US dollar will cause headwinds to the price. Upbeat trial results for COVID-19 treatment may also aid investor sentiment.

On the price front, gold may face initial resistance at $1,800 an ounce, breaking the same would move the target towards $1,880 followed by $2,000 levels. An unexpected drop below $1,665 would extend weakness, but the downside turnaround point is seen at $1,545.

In the domestic market, if conditions remain unchanged, prices would look towards the psychological level of Rs 50,000 per ten grams initially. Consistent trades above the same may move the target towards Rs 62,000 or more later. Conversely, a drop below Rs 38,000 is less likely in the present market conditions.

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