Gold likely to remain choppy, buy on dips amid weak global economic outlook: Kotak Securities
COMEX gold trades marginally higher near $ 1,735/oz after a 1.2 percent decline yesterday. Gold rose as high as $ 1,775.8/oz in intraday trade yesterday but failed to hold the momentum and break past the $ 1,800/oz level and corrected.
Gold slipped as sharp gains in the equity market reduced safe-haven buying. Asian equity markets are trading higher after a sharp 3.8 percent rally in US market yesterday. Risk sentiment improved as Moderna, a Cambridge, Massachusetts-based company that manufactured an experimental COVID-19 vaccine, announced the encouraging early results from its Phase-1 clinical trial Monday morning.
Risk sentiment improved also as prior epicentres of the coronavirus outbreak including New York, Italy and Spain are gradually lifting restrictions. Gold, however, benefitted from losses in the US dollar index which fell 0.8 percent yesterday on reduced safe-haven buying. Also supporting gold price is expectations of additional measures by central banks and governments to support their economies.
ETF investors moved to sidelines amid increased price volatility. Gold holdings with SPDR ETF were unchanged at 1113.78 tonne, highest since April 2013. Gold has corrected sharply after another failed attempt to break past the $ 1,800/oz level. We may now see choppy trade, however, buy on dips is recommended due to weaker global economic outlook and hopes of additional stimulus measures.
Base metals on LME trade sideways to higher in early trades today following yesterday’s sharp rally. The metals pack is supported by upbeat risk appetite as is evident from a jump in global equity indices amid optimism over virus vaccine along with opening up of more economies across the globe including various states in the US.
Base metals may further seek support on hopes of an uptick in demand from top consumer China as data from the nation point to early signs of recovery along with loose monetary stance by central banks of major economies. In China, data yesterday showed that the nation’s new home prices rose at a slightly faster pace in April, adding to signs that the country’s property market is slowly recovering.
Furthermore, prices may also seek support from weakness in the dollar. The Dollar index slumped more than 0.7 percent yesterday and trades little changed today on the back of easing safe-haven demand and the growing expectation of more easing by the US Fed. The gains may, however, be capped amid lingering worries over global economic health along with renewed tensions between US-China. The recent deluge of bleak data from major economies like the US and Euro Zone highlights the extent of economic damage due to virus outbreak which in turn is fanning demand worries.
Overall the metals pack may trade with a positive bias tracking upbeat risk appetite however global growth worries and US-China tensions may continue to spell caution.
NYMEX crude has surged more than 4 percent to trade above $ 33/bbl after a sharp 8.1 percent gain in the previous session. The June contract which is due to expire today is trading at a premium to July contract, a wide contrast from the last expiry when the price plunged to historic sub-zero levels.
Crude oil has rallied sharply in the last few days on hopes of a tighter market as demand outlook is improving with easing virus-related restrictions and as producers are working towards cutting output aggressively. US crude production has already fallen to 2019 lows while rig count has dropped to 2009 lows. Adding to it, the latest US EIA drilling activity report noted that US crude production from shale resources may fall from 8.019 million barrels per day to 7.822 million, the lowest since August 2018.
OPEC and allies are cutting output by 9.7 million barrels per day while Saudi has indicated the possibility of an additional 1 million barrels per day. While the general momentum is still on the upside, we may see choppy trade as market players position for expiry as well as inventory report.
The focus will continue to be on economic data from major economies and development related to the virus outbreak and US-China tensions.
The author is VP- Head Commodity Research at Kotak Securities
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