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Gold roars past US$2,000 in a perfect storm

A weekly market summary, Aug 3-7

GOLD contracts started the week on a positive note Monday morning on safe-haven buying, as the worsening Covid-19 pandemic continues to stifle the US economy and uncertainty arose over unemployment support. President Donald Trump's tweets about postponing the November polls only added to uncertainty.

The dollar remains weak and doubts about its role as the world's reserve currency of choice re-surfaced. And with 10-year bond yields globally near lows or in negative territory, gold appeared attractive as a risk-mitigating asset.

Comments from central bankers from the Fed, the BOJ to the ECB weighed on bond yields as they reiterated the damaging effects of the coronavirus on their economies, how it would weigh on consumers and businesses for some time, and why significant fiscal and monetary policy support is necessary.

Prices above the psychological US$2,000 were sustained and new record high prices established each day of the week, as optimism over a V-shaped recovery from the pandemic waned with the number of confirmed cases continuing to rise in the US, the world's largest economy.

Safe-haven buying of gold continued even as deadlock in Washington over a coronavirus relief deal remains. Tension between the US and China deepened with the status of the on-off trade deal uncertain.

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In the long term, physical demand of gold in India and China, which are large consumers, remains soft with record high prices in these key retail markets. Chinese gold dealers were already offering steep discounts as physical demand plunged last week. China's gold consumption fell 38 per cent year-on-year in the first half of 2020, hurt by the outbreak and a slowing economy. Consumption nearly halved in the first quarter.

The US dollar may be a headwind but is considered less likely so, as the US economy may not perform as well as other developed nations, most of whom are managing the fallout from Covid-19 in a very coherent manner.

Technical Analysis for Comex December Gold Futures (GCZ20)

Technical indicators on the daily charts are showing trajectories which are sending mixed signals, though quite a few of them are at very overbought levels. The 14-day RSI is in deep overbought territory, but the MACD (moving average convergence divergence) index with an upward slope indicates a trajectory that is pointing to higher prices.

For the Comex GC Dec 20 contract, the next chart resistance is at US$2,100 psychological level as prices are trading in uncharted territory. Support lies at the psychological US$2,000 with the previous resistance becoming a formidable support. I would say this has now become the new technical level to crack, as we believe gold investors would be looking to dips to add to long positions. The next target of US$2,100 may be realised sooner than expected by the end of 3Q2020, and US$2,200 by end-2020.

  • The writer is senior manager, commodities, Phillip Futures

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