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Gold rallies on stimulus hopes and supply squeeze

A weekly market summary March 23-27

GOLD this week rallied 16 per cent after the sell-off last week. The global equity meltdown and treasury yields hitting all-time lows had many investors liquidating long gold positions to meet margin calls. Gold rallied off last week's low when the US Federal Reserve announced a string of measures and more quantitative easing to support the US economy and increase liquidity in financial markets.

Gold futures prices extended their rally to a two-week high. The recovery in equities and weakness in the dollar also helped gold to regain its shine. Gold was also supported by tightness in the physical market with gold refiners and miners shutting down operations in Switzerland, the EU and South Africa. With airlines cutting flights, gold dealers are facing issues over transporting bullion. Tight supply and new gold purchases have sent futures gold contracts in New York skyrocketing, while London spot gold premiums reached the highest levels since the 1980s.

What should investors look out for in the longer term?

The Covid-19 factor has supported gold's appeal as a safe-haven asset, as the number of unknowns about the spread of the epidemic remains. The number of countries increasing massive stimulus programmes would eventually debase fiat currency and increase the appeal of gold. Similarly, the financial markets meltdown in developed nations combined with uncertainty brought on by low interest rates would bolster gold investment demand.

Net gold purchases by central banks, the largest holders of physical gold, are expected to remain robust. On the other hand, physical demand for gold in India and China, alongside expectations of weaker economic growth in other large consumers, may result in weaker demand.

Technical Analysis for Comex April Gold Futures (GCJ20)

Daily technical indicators are hovering slightly above mid-points, indicating that further movement up may be the path of least resistance. Gold has tested the US$1,700 levels and found resistance. The bullish trend is however still intact and is supported fundamentally. The support after US$1,600 an ounce lies at the psychological level at US$1,500 and US$1,450. Major resistance levels for the April Comex Futures are at US$1,700 and US$1,750 an ounce.

Weekly market assessment: Gold had a good run up to US$1,700 before retreating. It looks like the market will not be testing this level soon despite the fundamental bullishness.

  • The writer is senior manager, commodities, Phillip Futures

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