After a major rally earlier this month, gold is now seen struggling to decisively break above the psychological $1,700/ounce despite unprecedented uncertainties enveloping the world. Prices have been moving in a narrow band of $20 above or below the $1,700/oz mark in recent days.
A stronger dollar and utterly weak demand are acting as headwinds for the yellow metal. Import into two of the world’s largest markets — China and India — has dipped by double-digits since the beginning of the year.
Imports plummet
China’s import in March was an estimated 18 tonnes, falling by over 80 per cent year-on year and the lowest since January 2018. According to reports, China Gold Association has estimated a 50 per cent decline in gold demand in the first quarter of the year.
Similarly, India’s import fell in March by 65 per cent to around 22 tonnes, the lowest in the last seven years. Demand conditions are likely to remain muted for several months ahead.
At about ₹46,000 per 10 grams, physical demand has all but evaporated in India given the price sensitivity of the market. The industry expects demand to plunge to multi-year lows this year. On the other hand, at every rise in price, scrap sales are booming, adding to the availability.
Investment demand
Additionally, many central bankers reduced their gold purchases in the last quarter. If anything, some countries may even decide to sell gold to finance their debt. So, gold is now a pure fund play. Interestingly, weak physical demand is offset by investment demand, especially in developed economies. This is evidenced by large inflow into gold ETFs estimated at over 300 tonnes since the beginning of the year.
While physical demand is weak in the major consuming markets and investment demand is picking up in countries with ultra-loose monetary policy, speculative capital which usually drives gold prices, has remained in the sidelines so far. What will happen if speculators decide to jump on to the gold bandwagon?
The spread of the pandemic holds the key. If it comes under reasonable control by June and lockdowns are lifted, then economic activity will begin to gradually revive over the third quarter. By the last quarter, equity and commodity markets may rebound from their lows.
In the event, less-committed gold bulls will exit and move to other markets. This will put downward pressure on gold prices. The gold market is akin to a speeding train. It is risky to board or alight from a speeding train. It will need special skills and is not for the weak-hearted.
The writer is a policy commentator and commodities market specialist. Views are personal.