'In battle between actual and perceived risk, gold to remain directionless'

A substantial correction in gold will only be seen when investors chose to exit the metal.

Ravindra Rao

The trend in gold has failed to garner much interest in the last few days as it follows a largely evident price direction. Since April, gold has made three attempts to test the pivotal $1,800 per troy ounce level only to be followed by a sharp correction. Even in the corrective phase, gold has managed to hold on to $1,680 and has recovered to retest the $1,700-level.

Gold has rallied sharply this year on safe-haven buying with the coronavirus outbreak causing a health and economic emergency. Monetary and fiscal easing measures to support the economies also boosted appeal for the metal. The metal has now entered a consolidation phase amid a lack of fresh triggers.

Virus outbreak remains out of control, as is evident from ever-rising infections that have now globally surpassed the 5.6-million mark. However, the situation is getting better in some major European economies and the US, which has helped them to ease restrictions and revive economic activity. Progress in vaccine development has also eased market nerves to some extent though it remains to be seen when a treatment will be found.

Downbeat growth forecasts reflect the negative impact of the viral outbreak. But some economic indicators show that the situation has improved from the slump of the early days of the outbreak.

Improved risk sentiment is evident from gains in the equity market.

DJIA index has recovered almost 40 percent from the lows of March. Easing of restriction and stimulus by central banks and governments are expected to reboot economic activity.

Considered a safe-haven asset, gold should have come under pressure with markets gaining traction but the metal continues to hold in a consolidation phase.

While the actual need for a safe haven has reduced, market players are holding on to the metal on perceived risks.

The situation is improving in some previous hotspots, however, fear of a second wave of infections is far from over.

Economic recovery is also expected to be laboured as governments take a cautious approach in reopening economies. This may cause governments to continue with stimulus measures.

Meanwhile, we have a new challenge in the form of US-China tensions. Increased tensions over Hong Kong have kept market players nervous about its impact on the partial trade deal struck in January this year. Tensions could persist ahead of another major event this year--the US presidential elections.

The wait-and-watch approach is also evident from higher ETF holdings. Investors have continued to push money into gold to cushion the effect of the outbreak. We will see a substantial correction in gold only when investors chose to exit the metal.

The author is VP-Head Commodity Research at Kotak Securities.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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