Gold approaches US$1,800 while palladium breaks record to near US$2,900

GOLD prices are set to close the week near the US$1,800 an ounce psychological level, for the third week of gains in over a month after they broke the resistance at US$1,760 to reach the highest level of US$1,798 this week.

Gold prices had broken higher in the previous week after the Biden Administration targeted Russia with sweeping sanctions and diplomatic expulsions.

The limelight in the precious metals market for the week however, shone on palladium. Prices of the metal surged to a record high on bets that economies emerging from the pandemic would fuel demand for cars. Palladium, used in catalytic converters to curb emissions in petrol-powered vehicles, rose to another record, surpassing the previous record set in February 2020. Spot palladium touched US$2,878, while the active June futures contract traded on CME clocked a high of US$2,894. Prices have climbed more than 17 per cent this year, building on five straight annual gains, deepening supply shortfalls of the precious metal.

The palladium market has been in a production deficit for 10 years, and tighter pollution standards in Europe and China are spurring demand for the metal from vehicle makers. Issues at Russian mines, the world's largest, have added to supply concerns. UBS Group had forecast a deficit of about one million ounces in 2021.

As with palladium, gold prices have also been crawling higher throughout the week to near US$1,800, primarily driven by a retreat in bond yields. The dollar index, which had been dropping earlier this month, had however stalled its depreciation and was primarily traded sideways in a narrow range ahead of monthly central bankers' meetings.

The US Federal Open Market Committee (FOMC) meeting is scheduled next week. Expectations are that the meeting would most likely strike a more optimistic tone on the economic outlook, but chairman Jerome Powell is likely to emphasise that any changes to the stance of policy are still some way off.

The European Central Bank (ECB) held theirs on Thursday, when the ECB, as expected, left policy unchanged and kept stimulus programmes running even as it predicted a firm rebound in the euro zone economy in the coming months as pandemic restrictions are lifted. The bank would keep borrowing costs near historical lows.

Treasury yields fell on the capital gains tax proposal of US President Joe Biden who would roll out a plan to raise taxes on the wealthiest Americans, including the largest-ever increase in levies on investment gains, to fund about US$1 trillion in childcare, universal pre-kindergarten education and paid leave for workers. Of importance to gold is the decline in yields when it dawned on traders that the Fed would continue to be dovish and tolerant of higher inflation than what was considered before.

Yet amid signs that inflation has emerged in the near term as supply chains are disrupted for companies and prices emerge from the lows of the coronavirus pandemic, price growth is likely to slow as time passes. However, if these challenges are not resolved and inflationary pressures predominate, it would increase the appeal of gold as an inflation hedge.

The increase in the number of coronavirus cases in Brazil, India and a number of other hot spots has renewed the demand for safe-haven assets like gold. Despite the availability of vaccines, concern has been heightened by the number of cases that keep increasing in the most affected countries and the emergence of new variants like the double mutation.

Gold also had support from the physical market last week. Demand from China has bounced back from low levels and central banks swung to net buying in February. China, the world's biggest gold consumer, has been said to have given domestic and international banks permission to import large amounts of gold into the country. China has boosted shipments from Europe's premier gold-refining hub of Switzerland where shipments rose nearly fourfold to a seven-month high following the resumption of purchases in February. China's central bank is approving imports of about 75 tonnes a month to meet domestic consumption. However, the Indian physical gold market is expected to face headwinds due to the rapid spread of the coronavirus.

Technical analysis for Comex June Gold Futures (GCM21)

Gold has jumped to its highest price this quarter on Wednesday. Short-term daily technical indicators have turned positive, indicating further gains ahead. This week (at press time), the benchmark Comex futures contract faced headwinds just below the US$1,800 level and levelled off below US$1,790 towards the end of the week.

The main trend is up according to daily technical charts, and a trade through the 100-day EMA at US$1,795 will signal a resumption of the uptrend. A collapse of below the 50-day EMA at US$1,765 would ring a warning bell of an imminent down move below support at US$1,760 to test the low of US$1,723.

A sustained move over US$1,800 will indicate that buyers are willing to press prices higher. However, I do suspect that most traders may want to wait for the release of the FOMC statement next week, before committing and determining whether gold prices can muster sufficient mojo to break through resistance as bond yields appreciation have stalled.

• The writer is senior manager, commodities, Phillip Futures