Gold getting safe haven demand, but may head lower; here’s why

By Prathamesh Mallya

Gold prices have rallied at a fast pace in the recent weeks. After consolidating in the $1,270-1,280 range, for the most of May, the yellow metal rallied towards $1,348.08 on June 7, a move of around 6 per cent.

On the MCX as well, gold futures have rallied from Rs 31,300 on May 23 to Rs 32,735 on June 12, a move of 4.5 per cent.


Tensions between the US and China, the US and Mexico and the dovish Federal Reserve have fuelled the rally in gold.

Trade war here to stay
US President Donald Trump has emphasised that he was holding up a trade deal with China and had no interest in moving ahead unless Beijing agrees again to four or five major points, which he did not specify.

Moreover, gold bulls are also optimistic of an interest rate cut by the Fed. Trump, a long-term advocator of rate cuts, said that interest rates were "way too high" and the central bank had "no clue".

The FOMC will meet on June 18-19 against the backdrop of rising trade tensions, slowing US growth and a sharp step-down in hiring that have led the global markets to price in at least two rate cuts by the end of 2019.

Uncertainty might ease
With easing fears regarding US tariffs on Mexico, markets are now optimistic that Trump may shelve threats to impose more tariffs on China as well. He is expected to meet President Xi Jingping at a G-20 summit on June 28-29. Besides, Fed Chair Jerome Powell said that the central bank would act "as appropriate" in the face of trade war risks, leaving the door open for a possible rate cut.

Gold finally acting as safe haven
Money managers have been increasing their net longs in gold for the past six weeks in a row. They are net longs 117,915 as on June 6 compared with net shorts of 22,328 contracts as on April 28.

The risk element arising out of trade uncertainty between the two biggest giant in commodities is leading the fund managers to bet longs on gold.

Outlook
The yellow metal has started behaving like a safe haven asset, reacting to the global uncertainty. The spate of weak economic data from the US in the recent weeks also indicates that the momentum in the US economy might slow down with the Fed looking at rate cuts.

The momentum in gold prices clearly indicates that the risk is on in the global markets and hence risk premium for the yellow metal.

Hedge funds will have to liquidate their positions for any correction in gold prices in the weeks ahead. We expect spot gold prices to move lower towards $1,280 mark while MCX gold can move lower towards Rs 31,800.

(Prathamesh Mallya is Chief Analyst, Non-Agri Commodities and Currencies at Angel Broking. Investors should consult their financial advisers before taking any investment calls based on this article)