There Is Upside Potential For Gold

 Gold fell $40 last week and had broken the consolidation support band of $1780. USD index rose to 93.25, and the US 10y is 1.37. But September 22, i.e. the coming Wednesday, will be crucial as the Fed will give its verdict at 11.30 PM IST. After Thursday’s $50 slide, gold price looked to stabilize on Friday, although held on to multi-week lows near $1750. The main reasons behind this fall are -

• The US Retail Sales surprised to the upside in August, showing signs of strengthening economy and reinforced Fed’s tapering bets resulting in a fall in gold prices.
• On Friday, the gold price attempted a bounce but lacked conviction amid a broadly firmer US dollar.
• The troubled Chinese property developer giant Evergrande’s potential default story dented the investors’ sentiment and lifted the dollar’s safe-haven appeal. China’s real estate company “Evergrande” is supposedly in a cash crunch with a debt of over $300 billion.
• This company is the most indebted company in the world at the moment, and if it defaults, it will have global ramifications and will cause significant damage to global equities and risk assets.
• The Delta variant of Covid 19 created havoc with 2000 single day deaths.
• While rising Treasury yields on tapering bets also aided the greenback, limiting gold’s upside attempts.

 

However, gold and gold coins in Mumbai managed to sustain the lows and opened with modest gains in early trading hours on Monday in the USA, on some safe-haven demand amid a rough start to the trading week, much to the relief of the gold dealers in India. The reasons behind this recovery are -

• Global stock markets were sharply down in overnight trading.
• The U.S. stock indexes are also pointed to heavy losses and four-week lows when the New York day session begins.
• The cryptocurrencies were getting smacked on Monday, amid the risk aversion and on recent speculation, major countries like the U.S. and China will move to more tightly regulate them.

 

Gold prices were subdued on Tuesday as cautious investors and top gold dealers in India braced for U.S. Federal Reserve’s guidance on tapering its assets and interest rate hikes, while a risk-off sentiment stoked by China Evergrande’s debt crisis limited losses in the safe-haven metal.

Bullion is observed as a hedge against inflation and currency debasement likely to result from the widespread stimulus. A hawkish move by the Fed would diminish gold’s appeal, while an eventual interest rate hike would also raise the opportunity cost of holding the non-interest-bearing asset. All eyes are on whether the Fed will announce that it will begin asset tapering as it hands down its policy decision on Wednesday. The central bank will also release fresh economic projections and a new read on the officials’ expectations vis-a-vis interest rate hikes.

The Fed is likely to give an outlook on how soon and how often they think the economy will need interest rate rises over the next three years at their policy meeting on Wednesday.

Policy decisions by other central banks (Japan, UK, Switzerland, Sweden, Norway, Indonesia, Philippines, Taiwan, Brazil, South Africa, Turkey and Hungary) are also lined up this week. We believe that if gold regains its traditional behaviour, it should rise from these levels and counter the headwinds of moderately rising Treasury yields and inflation cooling a little. Gold is currently underpriced relative to our model forecast. If gold’s behaviour snaps back, there is upside potential for the metal.