Gold Loses Shine But Later Gains Lustre

 Gold was seen gearing up for another leg to the upside, as the bulls extended the recovery from three-week troughs of $1677.

Bullion has clawed back some ground after dropping last week to near the lowest level since June, with recent movements largely being dictated by the direction of bond yields

The weakness in the US dollar and Treasury yields continued to lend support. However; traders believe that the improved market mood on the economic optimism plays could likely play a spoilsport.

Gold steadied as investors weighed signs of an economic rebound amid better-than-expected U.S. jobs data against the implications of President Joe Biden’s spending plans.

U.S. employers added the most jobs in seven months with improvement across most industries in March, as more vaccinations and fewer business restrictions supercharged the labour market recovery.

The U.S. economy created the most jobs in seven months in March as more Americans got vaccinated and the government doled out additional pandemic relief money.

• Nonfarm payrolls increased by 916,000 last month
• February employment was revised up to a 468,000

Following these data numbers, gold dealers in India witnessed the first quarterly drop in the price of gold since 2018. A growing economic recovery and rising bond yields created bearish sentiments for the yellow metal.

We’ve already seen a $1.9 trillion helicopter money drop this year, and the Biden administration appears just to be getting started.

The latest reading of the government’s CPI (Consumer Price Index) continues to suggest that inflation so far remains low. Even if we do experience high inflation, government officials continue to assure, it will be transitory. Despite these weak guarantees, the financial establishment is starting to sound the alarm.

U.S. President Joe Biden's announcement of a long-awaited $2 trillion-plus job plan last week has raised some concerns over inflation.

The ongoing threat of inflation – and actual inflation – will result in more buying of gold, silver, and other hard assets. Especially since Fed Chief Jerome Powell has said that the central bank would be happy to allow inflation to persist for a while before taking any action.

This means that the central bankers will not hike interest rates or pull back bond purchases to slow things down. And when government-reported inflation rises well above 2%, while interest rates remain at lower levels, the resulting negative real interest rates will support gold prices.

This inflationary scare comes at a time when the government is allowing running free massive stimulus measures to bail out states, businesses, and consumers – all in the name of combating the pandemic.

During these times, some investors view gold as a hedge against inflation and hence the drop was not much lived.

Gold once again gained momentum as this week opened, over the following reasons – 

Yields- The benchmark 10-year US Treasury yields have slid below 1.7% after rising to the highest level seen in 14 months over the past few sessions. This has also turned the dollar bearish, sending it to an almost two week low against most of its major rivals. While lower bond yields decrease the opportunity cost of bullion and make it more appealing as an investment, a weaker dollar drives up purchases of gold and gold coins in Mumbai by holders of other currencies, helping push up its demand as a result.

Corporate taxes- The yellow metal is also trading bullish on the rising prospects for higher corporate taxes in the US after President Biden stood by this proposal as a way to pay for the recently announced $2 trillion infrastructure plan. Additionally, the precious metal’s safe-haven appeal also enjoyed support from recent comments from Cleveland Fed President Loretta Mester on the central bank’s plans to remain dovish to boost economic growth further.

Meanwhile, traders are also watching the progress of debate over Biden’s $2.25 trillion infrastructure proposal, as Republicans expressed guarded support for a more limited plan. Any progress in these talks will directly affect gold and gold coins in India. Whether on the upside or downside- we need to wait and watch!

Covid has become avid

Recently we have seen gold coming under pressure. Even officials from the US government and central bank anticipate the economy to post a swift recovery, boosted by strong COVID-19 vaccine rollout programs and multiple rounds of fiscal stimulus. 

Top gold dealers all over India agree that there is optimism in the markets about improved economic outlook. This positivity is further supported by an improvement in consumer spending, which in turn would hike up inflation – one of the main reasons that have been strengthening US Treasury yields.

On March 29, gold and silver plunged again amid strength in the dollar index. Both the precious metals settled on a weaker note in the international markets. Gold made a swift move to $1744 from its base of $1728 last week on Thursday evening but later the pressure of rising USD Index towards 93 killed all the gains. Now the 10y and 30y finds key barrier of 1.65 and 2.40 respectively.

The dollar index gained again and traded at four and a half months highs and inched closer towards the 93-mark, pushing the yellow metal lower. Strength in the dollar index triggered selling in both the precious metals.

Gold extended its biggest fall in more than three weeks as President Joe Biden prepared to unveil big spending plans after announcing major progress on rolling out vaccines. Biden said 90% of U.S. adults will be eligible for Covid-19 vaccines by April 19, boosting risk appetites even as they linger around new strains of the virus. The president will also this week unveil major plans to reboot the U.S. economy and boost employment.

Analysts at RiddiSiddhi Bullions Limited suggested that gold is heading for its first quarterly decline since 2018 as a budding global recovery reduces the safe-haven’s appeal. A stronger-than-expected dollar and increasing bond rates have also pulled bullion down from its record high in August last year.

In a speech on Wednesday, Biden is expected to focus on infrastructure as his administration aims to reshape the post-pandemic U.S. economy and government

The US also recorded a jobless claims figure of 684,000 for the week before last – the first reading below 700,000 since the pandemic sparked mass layoffs last year. This further boosted the dollar in one of its better recent weeks.

In another busy week for FX markets, the US dollar benefitted from its ‘safe haven’ status amid crises in Turkey and on the Suez Canal.

Last week started with news that Turkey’s President Recap Erdogan had sacked the country’s Central Bank governor Naci Agdal for raising interest rates to check inflation and to support the Turkish lira. He was the third Central Bank chief to be sacked since 2019.

The removal of Agdal from office led to “risk-off” dollar buying as the value of the lira against the dollar fell by approximately 12%.

Furthermore, the MV Ever Given has caught up attention all over in the media – a 400-metre, 200,000-tonne cargo ship that got stuck across the Suez Canal. 

With roughly 250 ships stacked on either side of the blockage and a reported $15bn worth of goods on board, there were worries that disrupted trade flows could disrupt international recoveries from the Covid-19 pandemic.

Analysts have also forecast further bearishness in sight for the precious metal on the back of rising hopes for global economic recovery. However, gold prices are likely to enjoy some support from the latest wave of the pandemic that has sent parts of Europe back into lockdown mode even as emerging markets like Brazil and India are also reporting a spike in fresh infections confirmed a spokesperson from RSBL.

Experts say the yellow metal could remain volatile amid strength in the dollar index and a rise in the US bond yields could weigh on the precious metal

The monthly U.S. non-farm payrolls report will be closely watched at the end of this week, with Federal Reserve policymakers so far citing slack in the labor market for their continued lower-for-longer stance on interest rates.

“In a week when the market is feeling so optimistic about the forthcoming payrolls release, it seems very likely that the greenback will find strong support.

Further strength in the dollar index could push gold prices below $1,700 per troy ounce this week. We expect precious metals to remain volatile this week.