Triggers expected to drive a rally in gold prices

 Gold lately has seen quite a lot of volatility. Last week we saw gold being the best performing precious metal, while this week it opened on a negative note.

The dip in Treasury yields last week helped boost the appeal of the non-interest-bearing metal suggested RSBL, one of the top gold dealers in India. Gold then stabilized later in the week as the dollar and Treasury yields pared some of their gains made in the wake of U.S. inflation data that came in significantly higher than expected. Prices paid by U.S. consumers surged in June by the most since 2008, topping all forecasts and testing the Federal Reserve’s commitment to sticking with ultra-easy monetary support for the economy.

Last week, the yellow metal found some life after Powell's testimony pushed back on recent hawkish pricing, while central banks and physical buyers also helped prop up markets. But, even as macro growth angst catalysed a re-pricing in expectations for Fed hikes, gold still could not catch a bid.

Gold fell below the psychological $1,800 an ounce level as-

• The U.S. new home sales missed expectations in June with a fall of 6.6%. The prior month’s number was also revised down. 
• New home sales were at a seasonally adjusted annualized rate of 676,000 homes in June, the U.S. Commerce Department said on Monday.
• May’s sales were revised down to a rate of 724,000 units from 769,000.
• The market consensus called for sales to advance to 800,000 units in June.
• On an annual basis, new home sales were down 19.4% from last year’s estimate of 839,000 units.

Gold ticked down following the data release, falling into negative territory. The gold market isn't able to break free of $1,800 an ounce as it is stuck and waiting for a new catalyst.

When evaluating the gold market one of the primary drivers of gold’s perception as a store of value is interest rates. There are two ways to look at interest rates. The nominal interest rates, which is the headline interest rates such as the 10 year Treasury Yields, and real interest rates Treasury yields adjusted for inflation. As inflation rises and Treasury Yields remain the same or move lower, real interest rates decline. This reduces the cost of holding a non interest bearing investment such as gold. Currently, real interest rates in US are negative. Therefore, the opportunity cost of holding gold is minimal, or to some, actually demonstrating a better return profile than cash or Treasuries.

Analysts at RiddiSiddhi Bullions Limited opined that, historically, gold prices typically rise as real or inflation-adjusted Yields fall deeper and faster into negative territory. Gold price have struggled in 2021. Interest rate experiences have reset higher in February. However recently interest rates have declined to the lowest level in five months. And monthly CPI data has increased. Therefore, real interest rates have moved significantly lower. Using the core CPI data analysed at 4.5% and the 10 year yield of 125 basis points, real interest rates is now running at -3.25%. In theory this should serve as a tailwind for gold prices

While a slower global growth profile, matched with transitory inflation, should keep Fed tightening at bay and eventually provide a beneficial environment for gold, risks remain in the near term. Given that gold's recent underperformance against slumping real rates continues to suggest a lack of investor interest, and consolidation of current market pricing that may result in higher real and nominal rates could still send prices lower.

Investors might have to wait until September to see how the next recovery phase unfolds. A new wave of the COVID-19 virus is sweeping through the U.S- , if the virus continues to spiral out of control, putting the recovery at risk, and then he would expect to see renewed interest in gold.

The triggers working in favour of gold price rally in the long-term are rising concern of global inflation that seems to be persisting further and increasing number of Covid-19 cases, which includes the delta variant cases in the US, some European nations and South-East Asian countries. Outlook for gold is still bullish and any dip in gold price should be seen as an opportunity by yellow metal.

Dont take off your eyes from gold

 Since the beginning of 2021, gold has witnessed a 5 % drop till date. It has been a rough path for gold as investors rotate out of the safe haven trade into riskier assets. The gold market continues to struggle as investors focus on the potential for tighter monetary policy and transitory higher inflation pressures.

Top gold dealers in India confirmed that the gold markets have been challenging to trade recently due to a stronger dollar. It was the strong USD that was clipping gold's wings. But before that, the USD index slipped fin 93.2 to 92.7 and 10y gained firm 1.15% to 1.29% amid US economic growth, uncertainty on Delta variant and inflation. Benchmark U.S. Treasury yields continued their bounce from five-month lows, further pressuring the bullion

Gold was subdued in volatile trade on Tuesday as the dollar strengthened, curbing inflows into the safe-haven metal despite some concerns over a surge in COVID-19 cases.

Gold prices hit a one-week low on Wednesday, though they’re up almost 2% in July. Gold price is pressurizing the lows, flirting with $1800 amid a renewed risk-on wave that has gripped the Asian market, as traders shrug off COVID worries for now.

Gold was down on Thursday morning in Asia, remaining close to a one-week low. Yellow metal once again lost its shine ass dollar strengthened, risk appetite increased as concern over surging COVID-19 cases subsided

Gold prices extended slide to their lowest in nearly two weeks on Thursday on the back of a rebound in stocks and firmer U.S. dollar, while investors looked to the European Central Bank for their stance on policy.

Spot gold fell 0.5% to $1,794.58 per ounce during Thursdays trading hours.

On the other hand, Dow regained the entire losses of Monday’s crash. Asian markets were seen rejoicing this recovery and India followed suit. Amid all the chaos and uncertainty, the focus will now shift to the upcoming FED meeting to be held this Wednesday... Powell’s new views on Wednesday will be of paramount importance, unlikely to do a tapering and boost for gold. As mentioned the heightened inflation and feared to be signs of stagflation, is a booster for gold since no one will focus on Dow then. So $1792-$1795 is still an immediate support from where there should be a recovery to $1810-$1815 possible while protective stop is at $1787-$1785.

But rising inflation could be setting gold up for a rebound.  We actually do see inflation tick up here; you can expect that gold will kick in.

A surge in coronavirus cases in the United States and other countries however spurred some safe-haven buying of bullion in recent sessions, with gold rebounding as much as 1.7% from Monday’s one-week low.

A lot of people in the gold market have taken their eyes off the ball this year, but if we get more bad news on the COVID front and equities weaken, you could get just that flight- to-safety buy in a market that can wake up pretty quick. RSBL analysts were of the opinion that world economies were moving towards recovery, trillions of dollars in U.S. fiscal spending, and the increasing demand for many metals as part of the global energy transition, should support commodities in the longer term, contributing to higher inflation expectations. In addition, ongoing monetary stimulus, alongside expected fiscal stimulus, adds conviction to the "here-for-longer" inflation case. While there are plenty of long-term fundamental factors that support gold prices, dollar and inflation continue to remain the most influential ones.

Gold expected to reach new highs

In many of my previous blogs, I have mentioned as to how some macroeconomic factors will play a significant role in influencing gold prices. One of the main factors were inflation. And finally this key driver has brought in the much awaited rally in gold prices. 

Gold rallied more than 1% on the day as Federal Reserve Chair Jerome Powell said he hears America's inflation worries "loud and clear" while still viewing these price spikes as temporary.

RSBL analysts confirmed that gold notched a three week high on Wednesday following Powell’s comments. He said that inflation by all measures is running higher than expected. In fact, Chairman Powell, on Wednesday, acknowledged that inflation is above what the Federal Reserve is hoping to see. However, he tempered that statement by saying that this level of inflation will "moderate."

To be precise, speaking before the house financial services panel, Chairman Powell said, "Inflation has increased notably and will likely remain elevated in coming months before moderating."

The Fed has retained the stand that it will continue its current interest rate policy and monthly asset purchases until there was "substantial" progress towards its goal of full employment and stable long-run 2% inflation.

Prithviraj Kothari of RSBL stated that the monetary policy of the Federal Reserve prior to the pandemic and following recession was to keep inflation at a 2% target. However, the Fed has decided to let inflation run hot so that they can put their emphasis on maximum employment. The current inflation rate stands at 5.4%- the highest-level inflation has been at since the 2008 recession and largest increase since November 1991.

According to some market analysts, gold is seeing some renewed buying interest as Powell's comments appear to have a dovish tilt to them.

There was some havoc in the market as inflation gripped the US markets. Initial reaction from the Fed was a cool one. A denial mode continued, except he added that the policy changed will immediately come into effect if they feel that inflation is beyond control. So the imminent action will follow soon maybe taking few more weeks to taper. 

Meanwhile on Thursday, the Chinese GDP (2nd quarter) grew 7.9% and its industrial output grew 8.3%. 

While in the U.S PPI inflation stood at 1.0%- twice the expectation of 0.5%. USD index slipped to 92.4 and 10y yields more vigorously at 1.33%. 

What does all this mean to gold investors?-   the Federal Reserve is likely to continue their current mandate letting inflation continue to run hot until they see substantial progress towards full employment. With the inflation rate already at record highs similar to those seen in 2008, if, in fact, they do not raise rates in attempts to curtail rising inflation, we could see those numbers actually move higher. Not forgetting the fact that equities, which are an alternate to gold, do not qualify as inflation hedge.

Hence once again investors will move focus to gold which has time and again proven to be an inflation hedge tool.

And we all know what happens once demand rises. The yellow metal is expected to reach $2000 mark – a new target set by many investors in the markets.

Gold Cannot Be Written Off So Easily

 Gold has been on a tough ride since the start of the year 2020. To be more precise, since August 2020, when it pulled below its record highs of $2000 and later wandered there for a while before entering a significantly negative zone.

The main reason for its fall was the launch of vaccines worldwide over signaling global recovery. There was a point when gold raked. At one point, the price of gold hit a near 11-month bottom at under $1,674.

Similarly, the month of June 2021 was not that great for the yellow metal as well. The previous three weeks were woeful for gold as it cascaded from five-month highs of just over $1,919 to a seven-week low of just above 1,761 at one point. That was a loss mourned by the top gold dealers in India of almost $160 or more than 8% in just four weeks! And indeed, with all the FedSpeak and weaker economic data throughout the week, Gold - the recent decline for which was well overdone - finally found some footing, and the yellow metal soared a little high.

Gold finally clinched on Friday for its first weekly gain in four days and since its unceremonious fall from $1,900 levels. But the difference was hardly something for the yellow metal to boast about.

Gold was again up on Monday morning in Asia as investors digested the mixed signals from the U.S. Federal Reserves on monetary policy tightening after the release of tame inflation data. The main question about the temporary nature of the current inflation rate caused the yellow metal to close higher on the day and on the week, which is the first occurrence of a higher weekly close for gold in four weeks.

We saw a recovery in gold, over surging covid-19 cases across large parts of Asia. On one hand, this recovery weighed in negatively on the investors' sentiments and a relatively stable dollar on the other.

Viral cases were seen in Australia, Malaysia and probable a new variant or turd wave was expected in India. The delta strain has exploded high and hence, new restrictions and lockdowns are being expected in some parts of the world.

In addition, Indonesia is a key emerging market that is fighting hard to tame the growing viral cases while a lockdown in Malaysia is set to be pushed forward, further triggering gold bugs to hold support around the $1,780 per ounce price levels for the near term.

Inflation - Investors also continued to digest inflation data released by the U.S. during the previous week. The core personal consumption expenditures index grew a smaller-than-expected 0.5% month-on-month in May while growing 3.4% year-on-year. Gold prices rose as much as 0.8% after the release of the data, the central bank’s preferred inflation measure.

Consequently, gold bugs are rallying over monetary and fiscal stimulus support globally in response to the world’s most destructive pandemic, thereby boosting the bullion asset’s value despite an uneven pace of recovery between regions.

Gold will likely continue to stabilize going forward as most Fed Chair Powell’s policymakers agree with him that inflation will be transitory.

Investors should think about the long term and pay truly little attention to what is happening in the short term. Looking at the near-term data, gold prices might plunge a little bit more. However, the lower the price of the precious yellow metal drops, the better a buying opportunity it becomes. Moreover, we cannot ignore the gold buying spree undertaken by the central banks. The central banks and the big buyers remain in the market. The day when central banks will say that they hate gold and start offloading from their reserves will be the day that the gold investors and gold dealers in India will need to get worried.