GOLD futures this week have been volatile, dropping US$82 an ounce early in the week and then recovering US$46 (at the time of writing). Prices collapsed after being weighed down by a surge in the equity market and strength in the US dollar. The slightly-better-than-expected economic data out of the US was also bearish for gold. The gold market however saw some support from China's interest rate cut of -20bp.
Gold futures did not collapse as in late March, and the market saw buying on dips as gold fundamentals stayed in favour of the long side as central bankers eased monetary policy and governments increased fiscal spending to prepare for the worst of Covid-19.
The gold market was jolted on Thursday, when US jobless claims surged by 3.341 million to a record 6.648 million, showing a much weaker labour market in the US. Comex gold futures rallied sharply on expectations of further stimulus measures.
The US Congress was also reported to be mulling another stimulus package this week. This and other monetary measures by the Fed and other central banks and governments would eventually debase currencies and see real rates coming down. The flush of liquidity in financial markets would also see inflationary pressures exerting themselves. These fundamental drivers would in the longer term help sustain a strong rally in gold, but volatility remains high.
What about the longer term?
The unknowns about the spread of the epidemic remains, while the number of countries increasing massive stimulus programmes would eventually debase fiat currency and increase the appeal for gold. Financial market volatility combined with low interest rates would bolster gold investment demand.
Net gold purchases by central banks, the largest holders of physical gold, may not be expected to remain robust. With the expansion of quantitative easing (QE) programmes, central banks would have less cash to spare. Further, physical demand of gold in India and China, with expectations of weaker growth in other large consumers, may weaken.
Comex June gold futures (GCM20)
Daily technical indicators have turned positive, with the RSI (Relative Strength Index) above the 50 level, and the MACD (Moving Average Convergence Divergence) has crossed over, indicating a "buy" signal on daily charts, but its trajectory is flattening, suggesting a consolidation. But the bullish trend is still intact and is supported fundamentally. Immediate resistance for the June Comex 100 oz contract is at US$1,640, followed by US$1,700. Support is at US$1,591 followed by US$1,500 and US$1,450.
Weekly Market Assessment: Gold had a good run up to US$1,700 levels before retreating. As Covid infections are estimated to peak in a week or two in major economies, it will likely consolidate below the US$1,700, though the fundamentals are still bullish.
- The writer is senior manager of commodities in Phillip Futures
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