Gold expected to reach new highs

In many of my previous blogs, I have mentioned as to how some macroeconomic factors will play a significant role in influencing gold prices. One of the main factors were inflation. And finally this key driver has brought in the much awaited rally in gold prices. 

Gold rallied more than 1% on the day as Federal Reserve Chair Jerome Powell said he hears America's inflation worries "loud and clear" while still viewing these price spikes as temporary.

RSBL analysts confirmed that gold notched a three week high on Wednesday following Powell’s comments. He said that inflation by all measures is running higher than expected. In fact, Chairman Powell, on Wednesday, acknowledged that inflation is above what the Federal Reserve is hoping to see. However, he tempered that statement by saying that this level of inflation will "moderate."

To be precise, speaking before the house financial services panel, Chairman Powell said, "Inflation has increased notably and will likely remain elevated in coming months before moderating."

The Fed has retained the stand that it will continue its current interest rate policy and monthly asset purchases until there was "substantial" progress towards its goal of full employment and stable long-run 2% inflation.

Prithviraj Kothari of RSBL stated that the monetary policy of the Federal Reserve prior to the pandemic and following recession was to keep inflation at a 2% target. However, the Fed has decided to let inflation run hot so that they can put their emphasis on maximum employment. The current inflation rate stands at 5.4%- the highest-level inflation has been at since the 2008 recession and largest increase since November 1991.

According to some market analysts, gold is seeing some renewed buying interest as Powell's comments appear to have a dovish tilt to them.

There was some havoc in the market as inflation gripped the US markets. Initial reaction from the Fed was a cool one. A denial mode continued, except he added that the policy changed will immediately come into effect if they feel that inflation is beyond control. So the imminent action will follow soon maybe taking few more weeks to taper. 

Meanwhile on Thursday, the Chinese GDP (2nd quarter) grew 7.9% and its industrial output grew 8.3%. 

While in the U.S PPI inflation stood at 1.0%- twice the expectation of 0.5%. USD index slipped to 92.4 and 10y yields more vigorously at 1.33%. 

What does all this mean to gold investors?-   the Federal Reserve is likely to continue their current mandate letting inflation continue to run hot until they see substantial progress towards full employment. With the inflation rate already at record highs similar to those seen in 2008, if, in fact, they do not raise rates in attempts to curtail rising inflation, we could see those numbers actually move higher. Not forgetting the fact that equities, which are an alternate to gold, do not qualify as inflation hedge.

Hence once again investors will move focus to gold which has time and again proven to be an inflation hedge tool.

And we all know what happens once demand rises. The yellow metal is expected to reach $2000 mark – a new target set by many investors in the markets.

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.