Commodity outlook: Gold in desperate need of a renewed safe-haven buying

With gold coming under attack from the twin threats of a strengthening US currency and dwindling safe-haven demand, investors are wondering what can revive interest in the metal. In today’s report, I’ll make the case that there are at least three economic threats which could easily resuscitate gold’s fortunes among safety-conscious investors. These threats include, the still-fragile emerging markets, a weak euro zone economy, and a distant (but possible) scare in the US equity market later this summer.

After closing lower for the fourth week in a row, the gold price is nearly six per cent below its February peak and at its lowest level since late December. It has also given back more than half its gains since November. This represents a clear loss of the forward momentum which gold possessed earlier this year. It’s also an indication that the bulls have much work cut out for them if they are to regain control of gold’s intermediate-term trend. 

It’s not helping the bulls’ cause that gold’s currency component has continually weakened each month this year. With the US dollar gaining in value after bottoming in early January, gold has had to contend with an increasingly strong headwind all year. Finally, after the latest rally in the dollar index began last month, gold could no longer hold up against the growing pressure of a stronger dollar.

The dollar’s latest breakout is in large measure a consequence of the vast improvements to the US economic outlook, as the jobless rate has hit multi-decade lows and retail sales numbers have recently improved. After the dark clouds hanging over the economy in previous months, mainly over fears surrounding the US-China trade war, investors are feeling confident enough to shed some of their risk aversion by purchasing stocks and selling some of their gold holdings. The dollar is reflecting this growing confidence in the US economy.

It’s not just the price of gold which has suffered from investors’ change in strategy from defense to “risk on.” Global Gold mining and exploration companies have seen their share prices decline in the last couple of weeks as participants rotate out of gold stocks and into other segments of the market, including industrial and tech stocks.

Marc Faber talking on debt, the global economy and the future of the dollar, recently suggested one should have 20-25 per cent of one's assets in precious metals. He also sees huge potential for Platinum to appreciate going forward. 

There are some factors which could potentially lead to renewed safe-haven buying interest in gold among investors. One such factor is the eurozone economy, which is still showing signs of weakness. As previously discussed, the latest Purchasing Managers Index (PMI) readings for Europe fell to 51.3 in April from 51.6 in March, according to HIS Markit. This is the lowest PMI level of the last three months. 

Although the latest data showed growth in German economic activity, the rest of the euro region saw its worst growth rate in six years. This tells us that there is still a basis for expecting a revival of concerns over the fragile state of the global economy in the coming months. Gold, in other words, hasn’t run out of fuel for another safety-related rebound. There is also the possibility that the widely-hailed rebound in the emerging markets in recent months could be setting investors up for a major disappointment later this year. Yet another possible stimulus to increase safe-haven demand for gold would be a weakening US equity market this summer. While stocks are just below all-time highs during the latest earnings season, an undercurrent of weakness is visible below the surface of the stock markets. 

CONCLUSION: Gold price bottomed last August and gradually turned around in the months that followed as safe-haven demand for the metal increased.  While there are a number of potential catalysts for a revival of gold’s fortunes in the coming months, the most salient observation right now is that gold’s immediate-term trend is still weak. 

Gold’s biggest obstacle right now is the increasing strength of the US dollar, and as long as it stays strong, gold’s currency component will suffer. This in turn makes it difficult for gold to launch a sustained rally and will likely keep the metal’s price below its March high of $1,324, for an indeterminate period. We need to see a significant decline in the dollar index before gold’s next buy signal is confirmed. For now, a defensive stance is warranted as the gold bears enjoy a short-term advantage over the bulls.

Technically, we expect prices to get strong support around $1250-55 (MCX: Rs 30,800- Rs 31,000) levels and pullback higher again towards the psychological $1,300 levels in the coming sessions.

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(The author is the Director of Commtrendz Research and these are only  guidance for prices. He is not liable for any gain/loss arising out of it.  He can be reached at gnanasekar.t@commtrendz.com.)