Gold has been range-bound, moving marginally either side of $1,700 an ounce despite massive liquidity infusion, near-zero interest rate, steady ETF inflows and global economic uncertainty — all a sure recipe for a bull run.

But the precious metal looking for direction is no surprise (See BL Commentary April 28 ‘Gold struggling to break above $1,700/oz’). A combination of strong US dollar and extremely weak physical demand in major markets is seen keeping the market in check.

However, the market participants are closely watching two potential developments. Even while reducing interest rates, many central bankers seem to be open to lowering them below zero, that is announce negative interest rates, in order to shore up sagging economies.

Fed and interest rates

There is now speculation about interest rates in the US moving to the negative territory. As of now they are near-zero. What the Federal Reserve would decide is, of course, anybody’s guess, although there seems to be pressure from the White House. On current reckoning, it seems unlikely anytime soon though. However, if the Fed announced negative interest rate, gold is sure to receive a big boost.

Another possible development is a new trade conflict between the US and China. President Trump is upset with China for the spread of coronavirus pandemic which has inflicted enormous damage on the US economy with massive job losses (more than 20 million jobs lost in April).

While trade between the two countries is continuing in terms of the phase one agreement signed earlier this year, there are underlying tensions. Any flare-up is sure to help the yellow metal.

Speculative interest

Interestingly, the level of speculative interest is still nominal in the gold market. If anything, speculative investors are seen exiting gold as evidenced by the market regulator CFTC’s report of May 5. One explanation for the current lack of interest from speculators is their negative experience in March when gold prices slumped.

So, if speculative investors decide to jump on to the gold bandwagon for whatever reason, it will be a force multiplier for the precious metal. The ultra-loose monetary policy and escalation of national debt may encourage them to seek safe haven in gold.

So, where is gold going? If there is a marked directional change to gold prices it would be to the upside. When supportive factors come into play, gold has the potential to breach $1,800. However, it would be liquidity-driven and speculation-driven price rally as the physical side of the market is enervated and physical demand has all but evaporated.

Imports into two of the world’s largest consuming markets, China and India, have declined precipitously since the beginning of the year. There is massive demand compression at the current international rates, worsened by weak local currencies.

Investors have to remain cautious and not get carried away by some ultra-bullish forecasts of gold prices (as much as $3,000/oz) doing the rounds.

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

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