Portfolio

Will gold prices continue to fall?

Rajalakshmi Nirmal | Updated on September 24, 2020 Published on September 24, 2020

Money managers are trimming their speculative positions, but fundamentals of the metal are still intact

Gold prices which left investors gasping for breath are now hitting a wall. In the global market, the price of the yellow metal has broken a key support at $1,910 and is trading at $1,867/ounce, down about 10 per cent from its highs in August.

Things that have worked against the yellow metal are: US dollar re-gaining strength and dwindling hopes of new stimulus from the Federal Reserve. The US dollar index which was around 91-91.8 in the beginning of the month, is now trading at around 94.37. Thus, investors who were betting on the yellow metal for its worth as an inflation hedge are having second thoughts and booking profits.

ETF volumes

Net inflows into global gold-ETFs which was about 103 tonnes in June and 167 tonnes in July, reduced to 39 tonnes in August. In September till last Friday, the net inflow was 43 tonnes, but as the month finishes, it may be well lower. Other side, money managers in gold futures at COMEX are also trimming their net long positions shows data of CFTC.

Sample this: The September 15th report on COMEX gold futures show money managers increased their speculative long positions during the week by 11,043 contracts and increased their short bets by 4,237 contracts. Gold’s net-long positioning stood at 111,098 contracts. In July, the net long position of money managers in any week, used to be at least 130,000 contracts.

 

The pressing question now is how much more will gold fall.

While on charts, immediate prospects don’t look great for the metal, and the short term trend is negative, the fundamental drivers for gold remain intact. Given that globally number of virus cases continue to increase, there are chances of countries in the euro zone and outside announcing a severe lockdown in the days to come.

However, even if this doesn’t happen, the upcoming US Presidential elections will help gold by making the dollar volatile. Besides, geopolitical tensions from the US-China trade tiff and Brexit uncertainty are also positives. Note that the outlook on USD is not bullish; the greenback is gaining not on its own fundamental strengths but weakness of the euro. Though economic indicators including unemployment rates and home sales have been positive, the US economy will recover only slowly. So, if gold prices decline to $1,800 levels, it may be a good entry point for investors who are sitting on cash.

India demand

With the festival and wedding season set to start and a good monsoon helping increased output, demand for gold jewellery especially from rural-India (that makes for over 50 per cent of gold demand) may recover from lows. In the first half of 2020, gold jewellery demand in India was down 60 per cent, y-o-y. Trade sources suggest narrowing of discount on gold in the spot market in India from an average $40-50 seen in last five months, to about $18-20/ounce in the coming weeks.

However, investment demand may continue to surpass consumption demand in India akin to global trend given the slow paced recovery in economy and job market.

Investors in gold in India too need not get nervous from the price correction and can continue their SIPs in the metal. Nippon India’s gold ETF, the largest gold-backed ETF in the country which was trading at a high of ₹49 a unit (one unit is 1/100th of a gram) in August, is now trading around ₹43.

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

Published on September 24, 2020
This article is closed for comments.
Please Email the Editor