Gold Will Be Watched Closely

Gold has had a great run of late, encompassing a 14.7% rise across just 60 trading days (from 1673 on Mar 8 to 1919 on June 1) which is an annualized pace of 61.8%. Last week gold and gold coin prices were seen hovering around $1900 an ounce. A lot of activity was seen happening which led to this price movement -

• The debate around price pressures,
• Speculation over whether the Federal Reserve will start talks on the idea of tapering its massive bond-buying program, 
• Thursday’s U.S. consumer-price index report numbers.

Data coming in from the US created a significant impact on the markets. On Friday, gold rose 1.1% as a Labour Department report showed the following key numbers -

• Some 599k jobs were added last month, compared to a 650k baseline forecast. 
• The unemployment rate fell to 5.8% from 6.1% in the prior month, hitting the pandemic-era low.
• The labour participation rate was little changed. 

However, this rally was short-lived as Yellen's comments dampened the rise. Bullion ticked lower after Yellen said on Sunday that President Joe Biden should push forward with his $4 trillion spending plans even if they trigger inflation that persists into next year, adding a “slightly higher” interest rate environment would be a “plus.”

Gold prices pulled back slightly following Yellen’s comment about inflation and interest rates. As a result, the 10-year Treasury yield rebounded, reflecting reflation hopes. Real yields edged higher, denting the appeal of gold as the opportunity cost of holding is increased.

Looking back at Friday’s close, a slight miss on May’s nonfarm payrolls data cooled fears about the Fed tapering stimulus and sent bullion prices 1% higher, keeping bullion dealers in India on their toes. Gold declined as investors weighed comments by Treasury Secretary Janet Yellen on interest rates against U.S. jobs data which missed expectations.

Piling on record historical global debts and holding rates down at 5,000-year lows are likely to stoke inflation like we haven't seen for a long time. Gold and RSBL gold coins have been sensing this since 2000 but have kicked into high gear once again since late 2019. You've no doubt seen and felt the increase in the prices of food and pretty much every other consumable. The Fed says the recent bump in inflation is transitory, but the action in precious metals says otherwise. It's why gold prices are up 42% in just the last two years. Sustained high inflation, coupled with low nominal interest rates, creates an environment of extended negative real interest rates. And that is when gold thrives, making bullion dealers in India happy.

Investors and bullion dealers in India will be closely watching commentary by the U.S. central bank as inflation ticks higher and policymakers move closer to paring the huge asset acquisition that saved the economy from the turmoil caused by the pandemic. The monetary support has driven the Fed’s balance sheet to a record, while muscular fiscal spending has enhanced government debt. Both may pose a concluding risk to the dollar’s value, potentially buffing the appeal of alternatives and probably pushing gold to new highs. 

Crucial Week For Gold Ahead

 Last week gold closed above $1900 an ounce for the first time since the start of 2021. This could once again mark the onset of bullish sentiments for the yellow metal. Spot Gold kept firm tone and consolidated under new nearly three-month high ($1912) on Monday, supported by weak dollar while growing inflationary pressures lift gold’s appeal as the metal is used as a hedge against inflation. Moving further, gold and gold coin prices in Mumbai scaled a near five-month high on Tuesday. This rally was driven by -

Weaker Dollar - The dollar index was down 0.2% against its rivals, making gold and gold coins in Mumbai less expensive for other currency holders. The U.S. unit registered its second consecutive monthly loss. Broad US dollar weakness became the main catalysts to help the gold post the biggest run-up in 11 months. The US dollar index (DXY) remained on the back foot as hopes of further stimulus and steady vaccinations in the West, recent in Asia as well, improved risk appetite for the metal.

Stimulus - The other supportive factor for the yellow metal is the monetary policy as it remains firmly stable, refusing to start changing the policy in response to rising inflation, arguing that the latest increase in consumer prices is transitory. Having proposed a $6.0 trillion budget, US President Joe Biden stretched talks over his $1.7 trillion infrastructure spending to June even as tax hikes become the key hurdle for the much-awaited stimulus.

Growing Inflationary Pressures - Last week, data showed U.S. consumer prices surged in April, with a measure of underlying inflation blowing past the Federal Reserve’s 2% target. The constant subdued tone around the US dollar, in retort to Fed’s policy expectations, continued to underpin gold price, as per the gold dealers in India. While investors awaited more U.S. data to gauge the extent of global economic recovery, Federal Reserve officials have repeatedly maintained they expect any rise in inflation to be short-lived, and said monetary stimulus would stay in place for some time.

Rising Demand - China’s factory activity expanded at the fastest pace this year in May as domestic and export demand picked up, though sharp rises in raw material prices and strains in supply chains crimped some companies’ production. Rising demand has resulted in pushing gold prices higher.

The true test for gold will be after the next couple of months of hot inflation reports and if we have some surprising better-than-expected nonfarm-payrolls reports.

Friday’s US Nonfarm Payrolls (NFP) will become important catalyst to watch for gold traders as markets for consolidation in the previous month’s disappointment. Should the headline US jobs figures print upbeat figures, traders may have an additional reason to expect the Fed action during the upcoming Federal Open Market Committee (FOMC), which in turn may underpin the US dollar and drag the gold and gold coin prices in India. But weak Nonfarm payrolls number this Friday may jolt gold prices toward the $1975 level.

Investors eagerly await Friday’s US Nonfarm Payrolls data for fresh hints on the economic recovery, which would likely affect the Fed’s policy outlook and in turn gold price. In the near-term, if gold can breach the $1,922 per ounce mark, it can open the room for further upside potential.