Gold Cannot Be Written Off So Easily

 Gold has been on a tough ride since the start of the year 2020. To be more precise, since August 2020, when it pulled below its record highs of $2000 and later wandered there for a while before entering a significantly negative zone.

The main reason for its fall was the launch of vaccines worldwide over signaling global recovery. There was a point when gold raked. At one point, the price of gold hit a near 11-month bottom at under $1,674.

Similarly, the month of June 2021 was not that great for the yellow metal as well. The previous three weeks were woeful for gold as it cascaded from five-month highs of just over $1,919 to a seven-week low of just above 1,761 at one point. That was a loss mourned by the top gold dealers in India of almost $160 or more than 8% in just four weeks! And indeed, with all the FedSpeak and weaker economic data throughout the week, Gold - the recent decline for which was well overdone - finally found some footing, and the yellow metal soared a little high.

Gold finally clinched on Friday for its first weekly gain in four days and since its unceremonious fall from $1,900 levels. But the difference was hardly something for the yellow metal to boast about.

Gold was again up on Monday morning in Asia as investors digested the mixed signals from the U.S. Federal Reserves on monetary policy tightening after the release of tame inflation data. The main question about the temporary nature of the current inflation rate caused the yellow metal to close higher on the day and on the week, which is the first occurrence of a higher weekly close for gold in four weeks.

We saw a recovery in gold, over surging covid-19 cases across large parts of Asia. On one hand, this recovery weighed in negatively on the investors' sentiments and a relatively stable dollar on the other.

Viral cases were seen in Australia, Malaysia and probable a new variant or turd wave was expected in India. The delta strain has exploded high and hence, new restrictions and lockdowns are being expected in some parts of the world.

In addition, Indonesia is a key emerging market that is fighting hard to tame the growing viral cases while a lockdown in Malaysia is set to be pushed forward, further triggering gold bugs to hold support around the $1,780 per ounce price levels for the near term.

Inflation - Investors also continued to digest inflation data released by the U.S. during the previous week. The core personal consumption expenditures index grew a smaller-than-expected 0.5% month-on-month in May while growing 3.4% year-on-year. Gold prices rose as much as 0.8% after the release of the data, the central bank’s preferred inflation measure.

Consequently, gold bugs are rallying over monetary and fiscal stimulus support globally in response to the world’s most destructive pandemic, thereby boosting the bullion asset’s value despite an uneven pace of recovery between regions.

Gold will likely continue to stabilize going forward as most Fed Chair Powell’s policymakers agree with him that inflation will be transitory.

Investors should think about the long term and pay truly little attention to what is happening in the short term. Looking at the near-term data, gold prices might plunge a little bit more. However, the lower the price of the precious yellow metal drops, the better a buying opportunity it becomes. Moreover, we cannot ignore the gold buying spree undertaken by the central banks. The central banks and the big buyers remain in the market. The day when central banks will say that they hate gold and start offloading from their reserves will be the day that the gold investors and gold dealers in India will need to get worried.

Key Drivers For Gold

 Last week was terrible for gold and gold dealers in India as it witnessed a 6.04% dip. This decline followed the comments released by the Fed. Fed’s hawkish stance spurred a new wave of concerns about tapering. However, prices stabilized at around $1,770 on Monday as the US Dollar dropped slightly from its two-month high. Some investors may take this opportunity to buy the dips, but uncertainties surrounding the Fed’s next interest rate move may continue to weigh on the prices.

The spot price of gold on RiddiSiddhi Bullions Limited reached $1,787.80 (£1,286) per ounce early on Tuesday morning, up 0.3% from where it rested at the close of play on Monday. Gold steadied after posting the biggest weekly loss in 15 months as the Federal Reserve’s hawkish shift damped reflation bets. Gold is attempting a bounce from two-month lows amid falling yields, although a broadly firmer US dollar is likely to limit the rebound.

Gold bears once again became active in the market but couldn’t sustain for long. Following were the key drivers for the yellow metal -

• Inflation - Fed President Bullard said he sees inflation running at 3% this year and 2.5% in 2022, which would meet our new framework where we said we are going to allow inflation to run above the target for some time. From there, we could bring inflation down to 2% over the subsequent horizon. This suggests that conditions may be maturing by the end of 2022 for the Fed to consider tightening, which is much earlier than the market had anticipated.

• Rate Hike - Inflation risks may warrant the US central bank beginning to raise interest rates next year, St. Louis Fed President James Bullard said Friday. His comments came after last week’s Fed meeting where officials signalled monetary policy tightening could start earlier than expected. Chair Jerome Powell further added that the Fed would initiate a discussion about scaling back bond purchases used to support financial markets and the economy during the pandemic. The June FOMC meeting forecasts signalled that two rate hikes are likely by the end of 2023 as economic recovery father’s strength and inflationary pressures intensify. The decision hinted that the Fed would raise interest rates and begin asset tapering earlier than expected.

• Treasury Yield - The benchmark of a 10-year US Treasury Yield fell to its lowest level since Mar 3, 2021. A flattening US Treasury yield curve also seemingly reflects markets attempting to price in the possibility of a 2022 rate hike.

• Dollar - Ultra-low interest rate environment and central banks quantitative easing since the Covid-19 pandemic has been riding gold and a tailwind. Hence, it may be more vulnerable to a pullback when the reverse begins. Although the retreat in the dollar alleviated the sell-off in gold, the near-term momentum may still be tilted to the downside as tapering fears weigh.

It’s clear that the economy is improving rapidly, and the medium-term outlook is very good. But the data and conditions have not progressed enough for the Federal Open Market Committee to shift its monetary policy stance of strong support for the economic recovery. And hence people are using the correction to buy gold from RiddiSiddhi Bullions Limited - the biggest bullion dealers in India, at these price levels; there is value to hold positions in gold, especially for the long run.