With the gold market failing to hold any key support at the $1900 level for a third straight session and the brunt of classic fundamental issues favouring the bear camp, the bias is clearly down. Certainly, inflationary conditions remain under the surface but have been shifted to the back burner, especially with equities and consumer sentiment creating anxiety daily.
The war in Ukraine, China’s economic slowdown, rising inflation and volatile stock markets have all conspired to undermine investor confidence so far this year, much to the chagrin of gold dealers in India and bullion dealers in India. After seeing record inflows in 2020, the gold price languished last year and has yet to make a big splash in 2022. The yellow metal did try to breach the $2000 level in early March and once again around ten days back. However, it has been restricted by expectations the US Federal Reserve will now act quite aggressively to bring inflation under control.
Gold has been holding very well above $1900 much to the happiness of gold dealers in India but has seen pressure from the dollar, and the underlying factor of the Fed is expected to raise interest rates by 50 basis points next week. Benchmark 10-year US treasury yields also stabilised, as investors awaited greater clarity on the “restrictive” policy the Fed plans to pursue next week to combat inflation by curbing economic growth. Gold is highly sensitive to rising US short-term interest rates and higher yields, which increase the opportunity cost of holding non-yielding bullion. However, gold is also seen as a safe store of value during economic and political crises.
We all know that when there is a rate hike, gold losses its lustre, making the bullion dealers in India helpless. And once again, the prospect of further US interest rate hikes adds to the relative attraction of the dollar over real assets like gold that have no yield. Fewer dollars are then required to buy an ounce of gold, reducing its dollar price.
Uncertainty over Russia’s next move in the gold market is another reason for caution. Given that a substantial proportion of Russia’s assets have been frozen, there’s always the possibility some of the country’s gold – understood to be worth around $140 billion – could be sold to make payments.
Events that could further derail shares and bonds include interest rate rises having unforeseen knock-on effects in emerging markets, or another outbreak of international tensions, for example, starting in the South China Sea or Iran. With gold prices falling to push higher despite a backdrop of the Ukraine war and rapid inflation, investors have probably decided to look elsewhere.
The inflation levels for March will be released via the PCE by the BEA this Friday, April 29. These two reports will most certainly be underlying forces affecting the upcoming changes in both - the dollar and gold.
It goes without saying that the upside breakaway in the dollar index adds significantly to the bear case, and it could take a very significant development from the war to spark a fresh flight to quality buying. However, a pre-emptive halt in gas exports by Russia to Poland and Bulgaria should rekindle energy price gains, and in turn, could temper current deflationary vibes.
Having said that, the long-awaited big gold rally could still be on its way. The gold price – currently just under $1900 – has, at least, displayed some stability since the turn of the year. So, it may be all that gold needs a bit more time. Poor returns from shares have unsettled investors recently, and any lack of improvement could spark moves into other asset classes.
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