Gold likely to witness extended gains; buy silver on dips: Kotak Securities

Gold has breached the pivotal $1,900-level and we may see extended gains unless there is a sharp rebound in the US dollar.

Ravindra Rao

Comex gold was trading higher near $1,930/oz after gaining 4.8 percent in the previous week. Spot gold hit $1,944, a new high that went past the record price seen in 2011.

In the domestic market, MCX gold hit a new high of Rs 51,184 per 10 gram on July 24. Gold has rallied sharply on a weaker US dollar, increased geopolitical tensions, rising virus cases, strong investor inflows and continuing stimulus measures.

The dollar index slipped to September 2018 lows, weighed down by concerns about the health of the economy amid rising virus cases. The diverging economic and virus situation in the US and Europe has also led to a rush towards euro.

The US and China have been at loggerheads for the last few weeks, however, tensions have intensified amid tit-for-tat actions, with the recent closure of embassies in Houston and Chengdu.

The latest leg of gold’s rally started after EU leaders agreed on a 750-billion euro recovery package, which signalled that central banks and governments may continue with measures to support economic recovery.

The focus now is on the US, where policymakers are discussing a fresh stimulus plan.

ETF investors have continued to put money into the commodity amid increasing risks to global economy. Gold holdings with SPDR ETF rose by 1.75 tonne to 1228.805 tonne, highest since March 2013.

While gold continues to rise, higher prices could further dampen consumer demand from countries like India and China.

Gold has breached the pivotal $1,900-level and we may see extended gains unless there is a sharp rebound in the dollar.

Comex silver gained about 2 percent to trade near $ 23.3/oz on July 27 after a sharp 15.6 percent rally in the previous week when the metal surged to its highest levels since 2013.

Silver has benefitted from persistent gains in gold price. Industrial metals, too, have benefitted from a weaker dollar, however, rising US-China tensions remain a cause of concern.

ETF investors moved to the sidelines as higher prices slowed fresh purchases. Silver holdings with iShares ETF were unchanged on July 24 at 17379.98 tonne, a record high.

In the last few sessions, silver has witnessed a mixed trade, indicating rising caution among investors about sustainability of recent price rally. However, a sharp correction is unlikely unless gold prices come under pressure. Hence, we maintain buy-on-dips view.

NYMEX crude traded mixed near $ 41 a barrel after a 1.3 percent gain in the previous week. Crude surged to March highs but is still struggling to extend the momentum.

Weighing on crude price are increasing challenges to global economic recovery amid rising virus cases and geopolitical tensions.

Mixed economic data also underscored the uneven pace of recovery. US manufacturing PMI showed improvement from a month ago but failed to meet expectations, while new home sales reading was better than expectations.

China’s industrial production rose 11.5 percent on the year in June but was down 12.8 percent in the first half of the year.

On the supply side, the US crude stocks remain elevated, while production has also started to pick up. A rise in rig count also indicates that production could rise in the coming days. The number of rigs drilling for crude oil rose by 1 rig to 181 rigs, the first increase in 19 weeks.

Starting August, OPEC and allies, too, will go slow on production cuts from 9.7 million barrels per day to 7.7 million bpd.

Reuters reports noted that Russian oil exports from Western ports are set to rise 36 percent in August from July, a sign that the country is looking to boost supply. However, supporting crude price is the persistent weakness in the dollar.

Crude may witness choppy trade, with price still near key $41-level, however, general bias may be on the downside, amid increasing demand concerns and prospect of higher supply.

(The author is VP- Head Commodity Research at Kotak Securities.)

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