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Gold to remain under pressure as market players play down US-China risk

June 05
17:04 2020

Ravindra Rao

Gold is hovering near the key $ 1,700 per troy ounce level after another failed attempt to sustain above the $ 1,750 an ounce level. The continued strength in equity markets has reduced interest in the metal however it continues to hold ground amid lingering worries about global economy.

We are currently in a risk on mode where riskier assets like equities and commodities have edged up while safe havens like gold and US dollar have underperformed.

Risk sentiment has improved as market players are hopeful that lifting of virus related restrictions and stimulus support from central banks and governments may boost economic growth.

If we look at the economic numbers, situation has improved from the early COVID-19 days however economic growth remains evasive. Unemployment is increasing across the globe albeit at a slower pace. Manufacturing and services PMI has recovered from the slump but are still below 50 levels indicating contraction in the sectors.

The economic indicators indicate that intensity of negative impact caused by the virus outbreak and it will be months before we see economic activity picking. Unless virus outbreak is controlled, governments may take a measured approach on easing restrictions further slowing economic recovery.

Market players are focusing so much on reopening of economies that they have downplayed other emerging risks in form of US-China tensions and civil unrest in US.

The US and China have been at loggerheads over various issues like handling of virus outbreak, situation in Hong Kong etc. While war of words continues, there has been no major action taken by US against China and no retaliatory move by Beijing either. After China approved the Hong Kong security bill, US retaliated by announcing removal of Hong Kong’s special status but took no direct action against Beijing. China had threatened retaliation against US interference but has refrained from taking any step so far.

However, the stakes are high as continued tension could threaten the fragile phase 1 trade deal signed in January. It took US and China months to iron out their differences and reach a partial deal. If the trade deal is affected, it will throw another challenge to global economy which is already struggling from the effect of severe pandemic. Both US and China are under severe economic strain and there is little reason for them to restart the trade fight however if tensions continue to intensify the deal could be targeted.

The author is VP-Head Commodity Research at Kotak Securities.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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