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Gold loses some lustre as the greenback begins to glitter

Ng Qi Siang
Ng Qi Siang • 5 min read
Gold loses some lustre as the greenback begins to glitter
Despite the move towards liquidity, an uncertain economy, unprecedented economic stimulus and a gradual recovery make it a good time to buy gold relatively cheaply.
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SINGAPORE (June 19): While global uncertainty is usually a catalyst for a surge in gold prices, recent fears of a second wave of Covid-19 infections have not seen a mad scramble for bullion. A strong performance from equities has, instead, seen investors reach for liquidity to catch the rising tide, reversing despite pandemic insecurities supporting gold futures.

Comex GC Gold futures prices came in slightly lower on Thursday, while the benchmark Comex GC Aug20 contract had a cold opening at US$1729.80 ($2411.06) on Friday after falling -US$4.50 at US$1,731.10 an ounce.

Similarly, the benchmark JAU April21 Gold Futures started the day at JPY5940/gram ($77.42) after settling JPY20 lower at JPY5942 last night.

Technical indicators on daily Comex GC Aug20 charts concur with expectations of flat prices, with 14day RSI stuck in the mid-50s range. Comex GC Aug prices are hovering around their 50-day simple moving average (SMA), indicating that gold prices are set to consolidate in the short term. Immediate resistance now stands at US$1755, followed by US$1776 and then US$1800; meanwhile, support lies at last week’s low of US$1,671 and the low of US$1,580.

In contrast, investors are becoming more cheerful about the prospects of equity markets.

CNN technical analyst Jim Cramer predicted on Thursday that the S&P 500 -- which covers the 500 largest public-listed firms in the US -- is currently following a bullish trajectory. Investors are thus converting bullion into liquid cash to take advantage of bargain buys as the Dow fell 39.51 points yesterday (June 18) in hopes of cashing in when the promised bulls come home.

China’s continued success in controlling renewed Covid-19 outbreaks has seen reassured investors avoiding gold for now.

“Gold prices reversed an early rally yesterday as the dollar strengthened on signs of progress in China in containing the new coronavirus outbreak at one of Beijing’s markets. Gold prices fell after Wu Zunyou, China's top epidemiology expert, said further coronavirus infections in Beijing should be "sporadic" and that the recent outbreak was contained,” remarks Avtar Sandu from Phillip Futures.

Nevertheless, Covid-19 has continued to rage outside of China, with global fears of a second wave of infections keeping gold demand steady. Around 400 workers tested positive for Covid-19 at a German slaughterhouse while in the US, cases are still below peak with new cases in Florida, Texas and California.

This has arguably led to the steep drop in the Dow yesterday, prompting more risk-averse investors to hold onto gold stocks to hedge against further exogenous shocks emerging from a second pandemic wave.

The pessimistic prognosis from Fed officials has also encouraged gold buys, with Cleveland Federal Reserve Bank President Loretta Mester predicting that the US economy will need one or two years to return to pre-pandemic levels. From the solid economic performance of 2.1% GDP growth pre-Covid, the US economy is likely to contract by 6% in 2020; unemployment has soared to around 9% and will stay that way until the end of the year.

Risk aversion is likely to be further fuelled by the unclear economic signals coming out of the US economy. While initial claims for state unemployment benefits have dropped for the 11th straight week, the prospect of slower recovery nevertheless looms large over investors. Unable to make head or tail of where the economy is headed, it is likely that investors will hold on to their gold as an “insurance policy” to hedge against the economy going further South.

“In the bigger picture, as stimulus is getting pumped into the global economy, together with questions raised over the smoothness in the reopening of key parts of the global economy, coupled with health experts reminding all that reopening too soon could cause more harm than good; could also mean that economic activity rebound could be pushed back later than sooner,” says Sandu. Devastating demand destruction from Covid-19, he warns, “cannot be overstated”.

Forex risk from unprecedented economic stimulus also makes gold a good hedge against the potential debasement of fiat currencies going forward. Liquidity in financial markets, low-interest rates and rising money supply will drive up gold prices in the longer term as cash becomes more readily available. Sandu notes that gold has historically been a good store of value over time, particularly when governments undertake fiscal and monetary expansion.

“Overall the picture of Gold remains fundamentally bullish. Expectations of a V-shaped recovery from the coronavirus lockdowns remain far-fetched. The long term fundamental drivers of Gold remain positive in outlook. However, in the short-run, gold prices seem to be reacting to headline news events and the technical picture has projected some consolidation ahead thus investors would be impacted by such risks,” the Philip Futures analyst concludes.

This week, gold prices are expected to consolidate in the week’s trading range. Long-term investors buying the dips in and around US$1700 and short-term traders selling at US$1750 on a dollar rally will help stabilise prices. As of close of market today, traders are bidding US$1,730.90 for gold while asking for prices of US$1,731.90.

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