Ravindra Rao
Gold prices on international exchanges have been trending higher for past five sessions. The April contracts for COMEX gold that was stuck in a narrow range of $50 for the past few sessions managed to breach the psychological resistance of $1,600 per troy ounce to hit January 2020 high of $1,615.9 on February 20. Further, spot gold prices on February 20 jumped to March 2013 high of $1612.98 and are up nearly 6 percent year-to-date.
On the domestic exchange, MCX April contracts for February 20 hit a record high of Rs 41,619 per 10 grams with prices up more than 6 percent year-to-date.
The rally in gold prices has been on the back of an increase in safe haven demand amid worries over economic impact due to coronavirus outbreak in China.
The deadly virus that originated in China’s Hubei region late last year has spread at an accelerated pace in past one month or so claiming 2,128 lives globally with all except 10 in mainland China.
The country has adopted various measures like travel restrictions and factory closures in order to limit the spread of contagion. However, these measures are disrupting global supply chains, which in turn has fanned global growth worries.
Gold prices have further sought support from a surge in investor interest as is evident from rise in gold ETF holdings. Gold holdings with SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, have jumped to 931.6 tonnes as on February 19, its highest since November 2016.
Furthermore, the recent rally in the US Dollar Index has done little to deter the uptrend in gold prices; which usually shares an inverse correlation with US Dollar. The Dollar Index has been rising for the past few sessions and hit May 2017 high of 99.722 on February 20. The rally in US Dollar has been due to expectation of relative outperformance of US economy with growth worries in other major economies like China, Euro Zone and Japan.
However, the improvement in risk appetite following a decline in the number of new cases of infection in China, along with more stimulus by China, may cap the upside.
In China, the number of new cases have been on decline for past three days, though it is still too soon to say that the outbreak has peaked. According to data from China’s National Health Commission, new confirmed cases in the nation rose by 394 on February 19, the lowest since January 23; although this was after the nation once again changed its method for counting infections.
Meanwhile, Chinese banks, in a largely expected move, cut the benchmark lending rate on February 20, adding on to the recent spate of fiscal and monetary measures aimed at cushioning the virus impact on the economy.
The one-year loan prime rate (LPR) was cut by 10 basis points to 4.05 percent from 4.15 percent and five-year LPR by 5 basis points to 4.75 percent from 4.80 percent, Reuters reported.
Overall, despite recent developments in China, the bull run in gold may persist at least until there is some sign of containment of the outbreak.
(The author is VP - Head Commodity Research at Kotak Securities.)
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