Gold Rallies To Record High But May Have Overshot Its Near-Term Upside
Overall, the current rally looks somewhat fragile. The possibility of price correction appears high.
Contrary to general expectation and benefiting from a surge in the inflow of speculative capital, amid fortuitous combination of factors, gold has rallied since Monday, March 4, in the international market, to reach a near-record high of $2,150 a troy ounce on Tuesday. In fact, on Monday, the yellow metal closed at $2,100 a oz for the first time.
The trigger came in the form of weak economic data from the U.S. that sounded an alarm bell among investors about looming economic slowdown in the world’s largest economy, further strengthening the case for a rate cut by the Federal Reserve. Interest rates in the U.S. is the primary risk factor for the yellow metal.
The U.S. treasury plunged to a multi-week low, boosting the appeal for gold a non-yielding asset. Other supportive factors included the ongoing geopolitical tensions that encourage safe-haven buying and central bank purchases.
As it happens in most rallies, it is likely the gold market has overshot to the upside. Wednesday, jobs report and Fed Chair Powell’s testimony are keenly awaited. While rate cut is almost certain, the timing is as yet unclear. Analysts who bet on a March rate cut got it wrong and now many are talking about a first rate cut in June.
The Fed’s stance has been clear — no rate cut in a hurry and any decision will be data driven. It is noteworthy that although inflation rate in the U.S. has fallen, it is yet to come close to the Fed’s target of 2%. Thus, Powell’s statement about the timeline for rate cut will have an impact on the gold market and has the potential to force a price correction.
As of Feb. 29, speculative net long positions had fallen more than 10% from the previous month, indicating bearish sentiment towards the yellow metal. In addition, outflows from Gold ETFs continued in February, the ninth month in a row.
It must be said that despite the exit of speculative longs and ETF selling, gold prices are holding up surprisingly well.
At the same time, several new projects to boost gold production are expected to come up this year and the next. According to market analysts, global mine supplies are expected to expand by 2 to 3%.
Tracking overseas prices, gold in the domestic market tested new highs. Marriage season, likely to last till the month of May, is sure to provide support in the coming weeks. But given that India is a highly price-sensitive market, the volume growth in physical gold sales in the form of jewellery may be muted. Imports into the country are moderating.
Overall, the current rally looks somewhat fragile. The possibility of price correction appears high. At the same time, once the U.S. Fed rate cut decision crystallises, gold is sure to receive a boost, even as the bond yields would decline and U.S. dollar would weaken from the current levels.
There are multiple factors that impact the gold market. Given the uncertainties surrounding the market conditions, caution should be the watchword for investors.
G. Chandrashekhar is a senior journalist and policy commentator specialising in commodity markets.
The views expressed here are those of the author, and do not necessarily represent the views of NDTV Profit or its editorial team.
