As the week opened, Gold was seen climbing to 3 months highs at $1855 as real interest rates on US debt fell to 3-month lows amid a rush to re-impose Covid lockdowns in Asia, where the latest Chinese economic data came in weaker than the analysts' forecast. Spot gold rose as much as 0.2% to $1,870.73 an ounce, the highest since Feb 1 during Monday's trading sessions.
The spread of the coronavirus was also dragged in some markets, with Singapore reporting the highest number of local infections in months and Taiwan also witnessing a spike in cases.
Gold and gold coins in Mumbai rose to the highest in more than three months as concerns over the pace of a global recovery crept back in following a flare-up in coronavirus cases in parts of Asia.
The second wave of this pandemic has hit India drastically. Families are being wiped out, restrictions have increased and the growth rate has fallen. In fact, it seems that not all the ones, who are affected, are being reported and the ground situation is even worse.
Furthermore, gold dealers in India are getting a boost from a more downbeat U.S. economic data outlook, which might push gold to $1900 levels. The $1,900 level has been dodging gold since the beginning of January when the precious metal initially began its downtrend, which only ended last month after gold seemed to have found a bottom just above the $1,680 an ounce level. And right now is the time when markets digest several misses on the data front. Market consensus is also likely to downgrade its expectations.
We have always seen an inverse relationship between gold and economic data. Gold and RSBL coins tends to outperform when economic data is weakening and underperform when the economic prospects improve. Economic data expectations are often adaptive, falling sharply following a negative shock such as COVID shutdowns and the accompanying weak data. As the data starts to follow a downward trajectory again and the market enters the corrective part of the data cycle, yields are held down and the USD come under pressure. Low real yields should send gold higher again. All of this could help push gold even higher.
Going forward, investors and bullion dealers in India should keep a close eye on gold's relationship with the U.S. macroeconomic data that have been disappointing recently, especially when it came to the U.S. latest employment and retail numbers.
Investors remain concerned that a sign of rising inflation will force the U.S. Federal Reserve to hike interest rates earlier than expected. However, Fed President Robert Kaplan said on Monday that he doesn’t see inflation becoming a problem anytime soon and reiterated that he didn’t expect a hike in the interest rate until 2022. However, he also urged the Fed to start normalizing policy.
Gold has been in the negative for some time now; however, the recent price rise has put the gold pack into the green and helped it erase this year’s decline. We see several reasons that will bring about a rally in gold -
ETF - ETF investors are starting to swing into net buyers again, after the recent consolidation, and it makes sense for the metals to play catch up to the recent moves higher in other commodities. Investor sentiment has boosted with inflows into bullion-backed exchange-traded funds.
Consumer prices - Further expectations increase in consumer prices as they start to bolster demand for gold as a hedge.
Inflation - The precious metal is a traditional hedge against inflation, which is back with a vengeance. Inflation fears are finally translating into higher precious metals prices.
Pandemic - A lot of uncertainty with Covid-19 strains and mutations in the Asia-Pacific region will lead to safe-haven buying increasing gold prices.
Equities - The gold price usually climbs when stock markets crash. The S&P 500 index of top US stocks blasted through 4,000 for the first time at the start of April, but now looks overvalued as jobs growth disappoints and higher inflation threatens.
Investors, gold dealers and bullion dealers in India now await minutes of the Fed's latest meeting, due on Wednesday, for further clues to the movement of the central bank’s monetary policy. Investors will turn to the minutes from the Federal Reserve’s April meeting due Wednesday for potential clues to officials’ views on the recovery and how they define “transitory” when it comes to inflation. Fed Vice Chair Richard Clarida said Monday that the weaker-than-expected U.S. jobs report for April showed the economy had not yet reached the threshold to warrant scaling back the central bank’s massive bond purchases. Meanwhile, Fed Bank of Dallas President Robert Kaplan said supply and demand imbalances and base effects will contribute to elevated inflation this year, but he expects price pressures to ease in 2022.
While the week is expected to be relatively quiet for economic data, investors will be anxious to see minutes on Wednesday from the Federal Reserve's policy meeting last month, which could shed more light on the policymakers' outlook on an economic rebound.
