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At 7-year high, gold eyes $1900 on stimulus-driven liquidity

Khaleej Times logo Khaleej Times 07/04/2020 Issac John
a cake sitting on top of a table: At 7-year high, gold eyes $1900 on stimulus-driven liquidity © Provided by Khaleej Times At 7-year high, gold eyes $1900 on stimulus-driven liquidity

Gold futures rallied for the fifth consecutive day, surging above $1,700 an ounce to the highest since 2012, underpinned by ample liquidity in the wake of massive economic stimulus packages initiated worldwide to contain coronavirus epidemic as precious metals analysts forecast the yellow metal to hit $1900 an ounce in weeks.

On Tuesday, as investors weighed the economic fallout from the pandemic and the prospect of more stimuli, gold widened the spread over spot prices. Futures rallied as much as 2.9 per cent to $1,742.60 an ounce on the Comex, rising to a seven-year high and traded at $1,714.70 at 6:22am in London.

Spot gold was 0.1 per cent lower at $1,659.53 an ounce, putting the spread between London and New York prices at more than $50. Earlier, the difference topped $60.

That widening gap between gold futures and spot prices echoes a pattern seen last month, when there were concerns about a shortage of physical bullion for delivery against contracts in New York because of virus-driven disruptions.

 Gary Wagner, analyst at Kitco, said a possible explanation for this spread that is widening is the expectation that the coronavirus in the United States will get worse before it gets better."On a technical basis gold has formed an inverse head and shoulders formation with Tuesday's move in gold futures breaking strongly above the shoulders indicating higher pricing ahead. The rally in gold futures could move as high as $1800 in the next two weeks."

Analysts at Citibank forecast the yellow metal at $1700 an ounce in a 1-3 month horizon and at $1900 in six to 12 months.

 In India, gold traded at Rs 45,724 per 10 gm on MCX even as silver too was on strong wicket. On Multi-Commodity Exchange (MCX), gold prices for June was trading Rs 1515 (3.47 per cent) higher at Rs 45,237 per 10 gm in the morning compared with earlier session.

Angel Broking Deputy Vice President Anuj Gupta said that the high gold price was expected to continue on a high due to investors interest in precious metals in view of economic uncertainties.

Kedia Advisory Director Ajay Kedia said the high price was due to the fact that gold was seen as a safe investment.

Market experts said gold prices could touch 2,000 dollars. In Indian market, it could go up to Rs 50,000 per gm in the futures market.

Riding positive indicators from markets abroad, gold traded on a new record high on the futures trade market in India.

The precious metal is in demand, with JPMorgan Chase & Co.'s Jamie Dimon saying the pandemic will lead to a severe downturn. Its jump came even as risk assets including equities posted gains on signs the outbreak is leveling off.

"The recessionary fallout of the Covid-19 outbreak on the global economy suggests investors are likely to continue to seek refuge in gold," said BNP Paribas commodities economist Harry Tchilinguirian and head of macro quantitative and derivatives strategy Michael Sneyd.

Also, the massive quantitative easing by global central banks and the unprecedented fiscal stimulus boost the incentive to hold gold, analysts said.

"With the Federal Reserve moving its policy rate to the lower bound and turning to unlimited quantitative easing, and other banks taking similar action, we expect real rates to remain in negative territory as nominal yields are suppressed. This raises the incentive to hold gold, particularly in such an uncertain economic environment," they said.

Two significant elements capping gold's gains going forward will be the dollar and more margin-call selling as people flock to cash during the coronavirus panic.

"Diverging activity in physical gold is disrupting the spot market," Michael McCarthy, chief market strategist at CMC Markets Asia Pacific, said. "Huge US demand for physical contrasts with European selling. This is particularly impacting futures contracts that are deliverable, and is the cause of recent widening of bid/offer spreads in spot gold."

issacjohn@khaleejtimes.com

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