After hitting a new all-time high of $2,063/ounce recently, gold’s nine-week rally came to an end last week.

On Friday, the metal came to as low as $1,912/oz and ended the week lower than from where it started. To be sure, headwinds in the form of firming US dollar and rising stock markets have come into play.

Since then the precious metal has been struggling to find upward traction and attempts to surge above $1,930 levels have remained short-lived. Clearly, rising risk appetite as evidenced by rising US stock indices is keeping gold in check for the time being.

The change in mood from one of gloom to positive is triggered by gradual revival of economic activities amid heightened hopes that a vaccine for the Covid-19 pandemic may soon be available in the market. New infection numbers too are seen falling.

Haven appeal fades

In hindsight, gold’s recent bull run – dazzling by all account - was essentially driven by a risk-off environment caused by the negative effects of the pandemic globally, and accelerated by unprecedented infusion of liquidity. The fantastic rally above the psychological $2,000/oz was essentially driven by too much liquidity chasing a well-recognised safe haven asset that gold is.

This will be clearer when one considers that the physical demand for the yellow metal has all but evaporated. Imports into two of the world’s largest markets – China and India – have declined to unbelievably low levels in comparison with the past. At current high domestic prices, there is palpable demand destruction.

There is also the mystery of missing speculative financial investors. Also, there is a decline in net long position at the bourses in the recent week, suggesting a substantial fall from the March highs.

Now, with signs of economic activities reviving, the safe haven status of the yellow metal is weakening. Falling inflows into gold ETFs provide additional evidence. If the macro data flow continues to stay positive and the dollar continues to gain, albeit gradually, gold would find it rather tough to make a renewed bid to reach the $2,000/oz mark. Also, ETF inflows are critical for gold to hold on to any gains it makes.

The scheduled meeting of the US Federal Reserve later this week is keenly awaited, particularly for the Fed’s new monetary policy strategy and inflation target.

Domestic prices

Indian gold market tracks global developments. In line with correction in the world market, the domestic prices too have moved lower. Vis-à-vis the dollar, the rupee is in a tight range, suggesting low currency impact. At the current astronomical rates (upwards of ₹50,000 per 10 grams), Indian consumers are in no mood to buy gold.

Despite poor physical demand and limited speculative interest, an upsurge in gold price towards $2,000, and even a little above, cannot be ruled out if tepid macro data and weaker dollar combine. But any significant upward movement in breach of $2,000/oz may not sustain for long because there is hope that the worst is already behind us and that from now on, the sentiment will only improve.

Ultra-accommodative monetary policy of major central bankers is most likely to continue for a long time. This alone will support gold from collapsing. Yet, once solid evidence of sustained revival of activities towards normalisation is available, the yellow metal is sure to face a crisis and show substantial correction.

Gold market is akin to a speeding train. There are risks in boarding this speeding train. Those who are brave to board now will be those who must know when exactly to exit. Timing is everything.

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

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