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Gold is Looking Weak below $1300

Gold is Looking Weak below $1300

 

(G. Chandrashekhar, senior journalist and policy commentator, is a commodities market specialist.

 

Gold prices have remained strongly tied to the US dollar and it has been in evidence in the first quarter of 2018. If significant weakness in the dollar in recent months boosted gold, geopolitical tensions accelerated the price rise, reaffirming the metal’s safe haven appeal. But now, both the support factors are waning gradually.

 

In recent weeks, concerns over trade war escalated. It was triggered because the US imposed tariffs on steel and aluminium imports and China started retaliatory action. The potential for a fierce trade war was never in doubt. If anything, China is capable of going well beyond tariff restrictions, under exigent conditions.

 

US President Trump’s aggressive Iran policy was another factor that lent strength to gold prices.  

 

Be that as it may, after rising to multi-week highs, gold has fallen back as global trade worries are subsiding. However, concerns over a potential trade war remain which will continue to lend support to the yellow metal until the situation normalizes.

 

Fed tightening will ultimately weigh on gold prices. After the widely expected hike on March 21, the dollar did not rise as anticipated, but shrugged off the effect. But now conditions are beginning to ripen for four rate hikes this year, instead of three. That is sure to lend strength to the greenback which in turn will impact gold prices over the coming months.

 

Interestingly on March 28 and 29, the yellow metal lost considerable amount of value. Quite apart from easing of geopolitical tensions and firming of the dollar, less-committed gold bulls booked profit.

 

Very clearly, gold would continue to receive support from ongoing, albeit somewhat easing, geopolitical tensions. But the outlook for the second half of the year is clouded. One negative factor is demand. Imports into two of the world’s largest consumers China and India have remained subdued.

 

Latest data from India and China showed divergent trends. Without doubt, China’s gold imports have remained robust; but it could be partially explained by Chinese New Year demand. The underlying demand appears to have weakened according to reports.

 

At the same time, imports into India have continued to soften, especially year on year terms. Gold prices in the local market have been hovering around Rs 30,000 per 10 grams. At this price level, demand begins to bite. Also, the aftereffects of demonetization of high value currency as well as introduction of GST and stricter surveillance have caused reservation among buyers.

 

While the ongoing marriage season in India is likely to provide some support to subdued demand conditions, June to September are months of low sales as rural India would be busy in agricultural operations. So, the next big demand opportunity is post-September.

 

The southwest monsoon is a critical driver of Indian agriculture and rural incomes. So, crop conditions in the next Kharif season harvest and prices growers receive would impact demand for the yellow metal.  

 

So on current reckoning, Fed rate hikes, potential for the dollar to strengthen further and reducing geopolitical tensions combined with enervated demand conditions in important markets will pressure gold prices down in the coming months.

 

As and when the price breaches the psychological $ 1300 an ounce level, the market may test the next lower level which is $ 1270/oz. It should be no surprise, if in the last quarter of this year, gold trades around $ 1250/oz or even lower subject of course to normal geopolitical conditions.

 

Disclaimer: Views are personal and not the views of the publisher.