More often than not, gold is a lucky commodity. Whenever market forces turn less supportive and prices come under downward pressure, something happens to prop the yellow metal up. This time is no exception.

Gold was under pressure the whole of November and lost around 4 per cent in price. It happened for a variety of reasons, including stronger dollar, the rising US stock market, signs of a détente in the US-China trade friction and of course, enervated demand in major markets such as India and China.

Psychological level

As is its wont, the metal defied many a bullish prediction. The gold market play put incurable bulls and many analysts to shame as price moved decisively below the psychological $1,500 a troy ounce, towards $1,450/oz. (See Business Line Commentary on November 8 and November 19).

However, a new set of factors have emerged creating renewed uncertainty among market participants. Eruption of fresh skirmish between the US and China in the form of the US President Trump signing laws purportedly targeting Hong Kong has annoyed China no end. Far from conciliation, this can weaken the already fragile situation.

Also, there are incipient signs of a currency war that Trump may start waging if one went by his recent tweets. The US President continues to put the Federal Reserve under pressure to reduce interest rates further.

The new developments have come as a saviour for the yellow metal. In other words, the prospect of a Phase One agreement between the two largest economies of the world is gradually receding. This should logically provide support to gold as a safe haven asset.

Asian demand

The strength of the bearish factors cannot be overlooked, though. Mainly, Asian consumer demand has been subdued this year; and for all intents and purposes, the same will continue in 2020 because of the highly unaffordable price of jewellery in the local currency in India and China. There is palpable demand compression as price elasticity of demand asserts itself.

Evidence of this is available in the form of gold imports into China and India. Continuing from previous months, during October, import into China from different origins fell to what is described as historically low levels. Jewellery sales remained below normal during October in the Asian major.

In a similar vein, imports into India were down 15 per cent year on year in October. While much bet was placed on festival demand, sales during the season failed to lift gold physical demand markedly. Demand continues to remain lacklustre as rural incomes are not seen rising adequately. Many rural areas witnessed kharif crop losses because of unseasonal rains till the end of October.

India’s November imports of an estimated 70 tonnes, although 5-month high, are still down year-on-year. And, adding to the high rate of customs duty, the rupee continues to remain weak at about 71 to a dollar, making landed cost rather high.

May stay subdued

Given these challenging conditions, investment demand is also seen weakening. Under the circumstances, gold is likely to end 2019 on a subdued note trading in the $1,450-1,500 range. Currently (Tuesday) it is trading at $1,460/oz.

Chances are high that the sentiment will spill over to the first quarter of 2020, which means that the chances of a renewed rally in the yellow metal look slim on current reckoning. However, until the US-China spat shows signs of abating, the yellow metal may manage to hold on to $1,450/oz levels and not slide substantially below it.

The writer is a policy commentator and commodities market specialist. Views are personal

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