WHILE crude oil made headline news this week as prices dived to all-time lows before turning negative, gold futures were slowly appreciating from the lows below the psychological US$1,700 level touched early this week. Prices were sustained above the US$1,700 level as expectations of more stimulus measures and fiscal spending by central banks and governments were on the table.
Benchmark Comex Gold GC June Futures last Friday settled at a weekly low, when hopes of the US economy reopening sooner than expected ignited a bout of long liquidation and curbed safe-haven buying. The June contract had closed below the US$1,700 mark, as guidelines laid out by President Donald Trump on reopening the US economy from lockdowns restrained buying of precious metals.
Gold prices fell back early in the week, when it dawned on traders that the prospect of crude oil futures trading in negative numbers might usher in an era of deflation, which may not be supportive of gold and reduces demand for gold as an inflation hedge. A rally in the dollar and falling stock prices on Wall street had also ignited a bout of long liquidation in gold.
However, expectations for additional stimulus measures from central banks pushed gold futures to new weekly highs towards the end of the week. Comments from European ministers also bolstered gold prices. Gold found its mojo on signs that the European Union may boost stimulus measures after EU politicians and officials made remarks about increasing stimulus.
A strong boost also came from expectations for additional US lending stimulus after the US Senate passed a US$484 billion pandemic rescue package. Heightened geopolitical risk in the Middle East helped gold rally mid-week after the US president tweeted about gunboat diplomacy in the middle East. And a Bank of America outlook report entitled The Fed can't print gold also made headline news as the report raised its target for gold to US$3,000 next year.
Technical analysis for Comex June gold futures (GCM20)
Daily technical indicators are positive and supportive of higher crude prices, that is, the 14-day RSI of the contract failed to cross below the 50 level on daily charts, which suggests that gold is supported on a retracement.
The bullish trend is still however intact and is supported fundamentally. Immediate resistance for the June Comex 100 oz contract is at US$1,788, followed by US$1,800. Support is at US$1,662 followed by US$1,592.
Weekly market assessment
In the big picture, the number of Covid-19 cases in the world has continued to increase. Central banks and governments have added more stimulus measures to prime up economies and save jobs. Questions have been raised over the smoothness in the reopening of key parts of the global economy. Health experts are reminding all that reopening too soon could cause more harm than good. All of these factors would continue to support gold prices in the near term.
The demand destruction due to Covid-19 thus cannot be overstated, volatility in financial markets remains, and precious metals especially gold are still a good hedge in an investor's portfolio of other financial assets. Gold remains a safe-haven as currencies are being devalued by massive stimulus programmes. This has also increased physical demand of gold to hedge against the debasement of fiat currencies.
- The writer is senior manager, commodities at Phillip Futures
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