Lack of fresh positive trigger can see gold prices fall, Fed fails to surprise

Ravindra Rao

After hitting a record high of around near $1,975 per troy ounce, gold retreated to trade near $1,940. The metal gained near 10 percent in July and most of it came in the last 10 days as market players positioned for the Federal Reserve's decision. Gold, however, ran out of steam as the US central bank failed to surprise.

The bank concluded its two-day meeting on July 29 and kept the interest rate unchanged at 0-0.25 percent. The Fed also indicated that interest rates will remain low till the US economy recovers and expressed its willingness to take all possible measures to support the recovery. This was expected as the bank has maintained an accommodative stance, given the risks to the US and global economy.

The Fed acknowledged improvement in economic activity and employment but maintained a downbeat outlook for the economy because of rising virus cases.

The US dollar index slumped to two-year low in anticipation of Federal Reserve's dovish monetary policy stance and cautious economic outlook. The US currency, however, stalled after the Fed meeting and this also helped trigger a correction in gold and most commodities.

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Ravindra Rao

Head - Commodity Research|Kotak Securities

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With the Fed decision out of the way, the trend in the dollar and thereby gold price will be determined by US economic data, virus-related developmentd and discussions over the stimulus package.

US policymakers are discussing a fresh stimulus package but still lack consensus. A drag in talks may continue to keep the pressure on the dollar. Also, virus outbreak stems, the outlook for the US economy may remain weak, keeping a check on the dollar.

While the dollar continues to be a key price-determining factor, ETF flows will also have a bearing on prices. We have seen huge inflows in the last few days but the lack of fresh positive triggers can cause investors to book profits, resulting in a correction in gold prices.

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

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