The slow progress of US-China trade talks is likely to drag on for a couple of months.
By Pritam Kumar Patnaik | ET CONTRIBUTORS | Mar 31, 2019, 11.19 AM IST
To hold or not to hold, that is the question every gold investor is wrestling with today. The decision would depend solely on the nature and tenure of your investment. A long-term trader would have looked at last Thursday’s correction in gold prices as an opportunity to average; whereas a short-term trader would gleefully wait for gold to breach the technical sell level of $1,290 to create shorts for the short term.
Last Thursday, we did see gold drop to a three-week low, breaching not only the psychologically crucial $1,300 level, but also coming painfully close to its technical sell levels.
So what caused the fall in the first place?
Gold found it extremely difficult to maintain above $1,320 level and retake the high of $1,325. It is safe to assume that a lot of short-term traders would have entered the market when gold price dropped from its high, with an expectation that a rally would soon ensue, but as the market remained largely negative to sideways. So, a lot of the short-term futures traders choose to pull the plug on their positions and decided against rolling on their positions from April 2019 to June 2019 contract.
This coupled with a strong US dollar, and international investors still chasing yield in the US led to the sharp correction.
That said, the market view is that the current correction is a good level for averaging or creating fresh longs. It is crucial to appreciate that earlier factors like a sustained dovish stance by the US Fed, slowing global economy, slew of economic growth downgrades, emergence of a negative yield curve in US bond market and messy Brexit led gold to rally and it still continues to exist. A continuation of dovish stance by the US Fed, which does not want to see US interest rates rise anytime soon, augurs well for gold.
While in the near term we will continue to witness bouts of stronger dollar, traders and investors will likely exhibit a bit more appetite for risk, by investing in riskier assets. The slow progress of US-China trade talks is likely to drag on for a couple of months. There is also no clear consensus in the marketplace on the eventual outcome of the US-China trade talks, thus, keeping the volatility high. This works in favour of the US dollar, and against gold.
However in the medium to long term, given the broad macroeconomic and geopolitical factors and the policy stance adopted by the US Fed, the positive sentiments for gold remain intact.
(Pritam Kumar Patnaik is Head of Commodities at Reliance Commodities. Views are his own)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of http://www.economictimes.com.)