Dampened Demand For Gold Over Rate Hike

 Last week gold ended  with a nearly 0.35% gain at $1,989.65, failing to close above $2,000 throughout the week. Concerns about rising inflation continued after 1Q A core PCE QoQ and 1QA GDP price Index came in higher than expected.

These damp sentiments continued as the week opened. Gold prices moved little in early Asian trade on Tuesday, hovering well below key levels as anticipation of a likely interest rate hike by the Federal Reserve supported the dollar and dented demand for the yellow metal.

Federal Reserve’s policy meeting due in 2-3 May this week remains each investors focus. The Fed is widely expected to deliver another 25 basis point rate hike on Wednesday amid strong US economic data and persistent inflationary pressures. Data showed that US consumer sentiment improved in April, while core PCE inflation exceeded forecasts in March.

But there is uncertainty about rate hikes and markets are not sure whether the central bank will signal a pause in its gold rate hike cycle.

This has kept demand for gold limited, given that rising interest rates push up the opportunity cost of holding non-yielding assets.

Bullion is known as a hedge against inflation and economic uncertainties, but rising gold rates tend to diminish demand for the zero-yielding asset.

Markets were also watching for a potential U.S. debt default, especially as a deadline for the government to raise the debt limit approaches. Treasury Secretary Janet Yellen warned of a potential default by as early as June 1.

Gold has struggled to hold the $2,000 an ounce level for nearly three weeks, as the yellow metal consolidated gains after surging to near-record highs earlier in April.

The short term and near term future of gold , is both uncertain and indecisive 

The next 18 months will be especially risky as the U.S. embarks on the 2024 election season

The political timetable of the election cycle between now and the 2024 elections in the United States and Taiwan will likely lead to more push-the-limit anti-Chinese aggressive foreign policy from the US. 

Fears of the Fed, coupled with a stronger dollar and yields will continue to see limited safe haven demand for gold, even as concerns over a U.S. banking crisis were renewed by the emergency takeover of First Republic Bank.

The future path of the yellow metal is likely to be determined by the Fed’s stance on interest rates,  any new developments in the banking crisis, important decisions before the election campaigns and most importantly the US China ties. 

Gold Expected to Remain Elevated

The average price of gold in Mumbai during FY 2022 was around Rs. 48000 let 10 gram which soared to around Rs. 55000 by the end of the year.

Currently gold prices are hovering around Rs. 63000 per 10 gm. Gold was seen touching new life highs due to the kn going geo political uncertainties.

In the first week of May gold jumped significantly. But the speed at which it rose , it was pulled down in double speed by Mid May.

Reasons for its volatility are many. let's begin with the gold price rise first

In 2022 Central Banks added 1136 tonnes of gold worth around $ 70 billion to their reserves. This addition has so far been the lagrest annual addition since 1967. The World Gold Council data revealed that Central Bank purchases , aided by rigourous retail investor buying and selling Exchange Traded Funds (ETF) outflows  , lifted annual gold demand to a 11 year hjgh.

Frther, the growing inflation triggering Central Banks to raise interest rates, tensions between Russia and Ukraine invoking fears of a full blown global war ,. uncertainty across stocks markets world wide and the recent collapse of the Silicon  Valle Bank, followed by stress sale of Credit Suisse to its rival UBS group, have contributed to rising gold prices.

Investors have reportedly been turning to gold and treasuries after the collapse of the Silicon Valley  Bank and Credit Suisse's implosion.

Now moving to this week's significant drop in the gold prices

Gold is down $230 to $1990 and that's the lowest level since May 1.

The $2070 zone of major resistance continues to hold and the $2000 level had held in two previous selloffs this month before breaking today. The gold market is soft today as the odds of a further fed hike next month creep up to 22% from 12% on strong retail sales, industrial production and home-builder sentiment.

Gold fell after robust US retail sales helped push the USD higher, weakening investor demand. This is despite an ongoing impasse on US debt ceiling negotiations. More hawkish comments from Fed officials also added to the headwinds for the precious metal.

We also expect a modest recovery of the dollar in the coming months. The pricing out of some Fed rate cuts and a modest dollar recovery will most likely result in lower gold prices but not in a change in trend. For 2024 we are optimistic about the outlook of gold prices. Monetary policy easing by the Fed, ECB and BoE will be a positive for gold prices in 2024 as the rate differences between USD/EUR/GBP versus gold (zero interest rate asset) narrow.

Basing the outlook on global financial instability , investor's and market players believe that gold will remain elevated in the coming years compared to pre COVID levels.

Dampened Demand For Gold Over Rate Hike

Last week gold ended  with a nearly 0.35% gain at $1,989.65, failing to close above $2,000 throughout the week. Concerns about rising inflation continued after 1Q A core PCE QoQ and 1QA GDP price Index came in higher than expected.

These damp sentiments continued as the week opened. Gold prices moved little in early Asian trade on Tuesday, hovering well below key levels as anticipation of a likely interest rate hike by the Federal Reserve supported the dollar and dented demand for the yellow metal.

Federal Reserve’s policy meeting due in 2-3 May this week remains each investors focus. The Fed is widely expected to deliver another 25 basis point rate hike on Wednesday amid strong US economic data and persistent inflationary pressures. Data showed that US consumer sentiment improved in April, while core PCE inflation exceeded forecasts in March.

But there is uncertainty about rate hikes and markets are not sure whether the central bank will signal a pause in its gold rate hike cycle.

This has kept demand for gold limited, given that rising interest rates push up the opportunity cost of holding non-yielding assets.

Bullion is known as a hedge against inflation and economic uncertainties, but rising gold rates tend to diminish demand for the zero-yielding asset.

Markets were also watching for a potential U.S. debt default, especially as a deadline for the government to raise the debt limit approaches. Treasury Secretary Janet Yellen warned of a potential default by as early as June 1.

Gold has struggled to hold the $2,000 an ounce level for nearly three weeks, as the yellow metal consolidated gains after surging to near-record highs earlier in April.

The short term and near term future of gold , is both uncertain and indecisive 

The next 18 months will be especially risky as the U.S. embarks on the 2024 election season

The political timetable of the election cycle between now and the 2024 elections in the United States and Taiwan will likely lead to more push-the-limit anti-Chinese aggressive foreign policy from the US. 

Fears of the Fed, coupled with a stronger dollar and yields will continue to see limited safe haven demand for gold, even as concerns over a U.S. banking crisis were renewed by the emergency takeover of First Republic Bank.

The future path of the yellow metal is likely to be determined by the Fed’s stance on interest rates,  any new developments in the banking crisis, important decisions before the election campaigns and most importantly the US China ties.