A weaker U.S. dollar supports gold market but risks are growing - Metals Focus
In its weekly update, analysts at Metals Focus said that bearish momentum in the U.S. dollar has been a tailwind for gold, which has seen prices hit all-time highs and push to within striking distance of $2,000 an ounce.
August gold futures last traded at $1,951.50 an ounce, up 0.35% on the day; meanwhile, the U.S. dollar index has fallen to its lowest level in two years.
“The dollar ’s slide comes as the U.S. lags most of the world in controlling the spread of COVID-19, and some expect the country ’s economic recovery to lag others, including Europe. The prospect of mounting U.S. deficits as a result of continued fiscal stimulus and ultra-low U.S. interest rates have also put the dollar under pressure,” the analysts said.
Although the gold market continues to benefit from strong long-term fundamental drivers, the U.K. precious metals research firm said that the gold market is a little overstretched.
“Should the U.S. dollar slide show a temporary pause or even reverses, further profit-taking appears likely,” the analysts said.
Metals Focus also said that record holdings in exchange-traded products could pose a risk for the gold market.
“Although the meteoric rise of gold ETF holdings has been instrumental in fuelling gold ’s rally, the resulting overhang is a risk. Although ETF investors tend to be stickier than those holding futures and forwards, some of these new positions will no doubt be tactical,” the firm said.
One last risk the analysts see in the marketplace is continued weak demand for the physical metal in critical markets.
“With the exception of physical investment, all the key demand components are expected to record double-digit losses this year,” the analysts said “Even if gold posts a noteworthy pull-back, its price will still be too high for many jewelry buyers (especially in local currency terms). Coupled with weak economic conditions, this will almost certainly restrain the scale of physical buying on dips.”