Tremendous Support For Economies And Gold

It’s been exactly a year since gold peaked at $2070 amid Covid concerns. And a year later, we are witnessing the gold prices crashing down. Initially, gold prices were capped by bullion banks capitalising on print taking after a sharp rise from March 2020. But currently, gold smashed lower in Asia Pacific trading, in a relatively quick drop from $1,750 to $1,677 as sellers continue the post-NFP momentum to this week.

RSBL gold slipped to an over four-month low on Monday as solid U.S. jobs data fueled concerns of a sooner-than-expected interest rate hike, which could increase the opportunity cost of holding non-interest bearing bullion. By putting things together, we can get a clear idea behind this sharp fall in gold.

• S Jobs report - The first being, as mentioned, that the selling momentum picked up after Friday's strong US jobs report. Gold had been consolidating since mid-July prior to the key risk event before finding fresh momentum to firmly breakaway below $1,800. Data from the U.S. Labour Department showed employers hired the most workers in nearly a year in July and continued to raise wages. That underscored remarks by Fed officials suggested a sooner than anticipated roll-back of pandemic era stimulus on the back of a solid labour market recovery.

  The US non-farm payrolls printed a strong 943000 non-farm job additions in the US during the month of July, stronger than the 870000 jobs as expected by the analysts and 850000 that was printed a month earlier. The latest data helped cement the thinking that the Federal Reserve (Fed) is moving towards the ‘substantial’ progress that it is looking for to start easing the bond purchases.

• Yields - As a result of a stronger than expected jobs report, the US 10-year yield jumped above the 1.30% mark after the data release and is now set to recover towards the 2% threshold to the end of the year. When we closely observe the commodities markets, we get to understand that any prospect of higher yields is a threat to gold. RSBL Gold is not doing well, and Friday’s strong US jobs figures have come as a slap on gold’s face. Moving forward, higher US yields will continue increasing the opportunity cost of holding the non-interest bearing gold, which didn’t even fully benefit from the overshooting inflation and the ultra-low US yields recently, thus resulting in a further sell-off.

• Stock Markets - Asian stock markets kicked off the week on a positive note, although the US indices had nothing more exciting than mixed performance after the announcement of strong jobs data on Friday. The US jobs data gave a small boost to the Dow and the S&P 500 which closed Friday’s session 0.41% and 0.17% higher respectively. Even though the strong economic data and prospects of a tighter US policy are better for value stocks, the rising Covid cases should keep the tech stocks in demand, regardless of a tighter Fed policy. However, the tech giants can expect a boost in prices.

• Vaccination - One of the reasons why gold dealers in Mumbai crashed from its peak was the worldwide vaccination drive. There is a general belief that the vaccination and the introduction of the vaccination certificate will prevent businesses from going through strict lockdown measures again. The ‘certificate’ setup will allow them to stay open instead and continue functioning with those who can present a valid vaccination certificate. The idea is obviously to get as many people vaccinated and get out of the crisis as soon as possible. In spite of a third wave threat, economies across are opening up and gradually moving towards safety. This could also possibly be a reason for the drop in gold prices.

• Inflation - The latest update on the US consumer price inflation is due on Wednesday, and the expectation is a certain steadying in the US consumer prices near last month’s 5.4% print. China released softer-than-expected consumer prices this Monday, while producer prices advanced to 9%, as an indication that the pressure on factory-gate prices remains strong.

Gold could fall towards $1,700 in the near term, however, we are still going to see a tremendous amount of support getting pumped into the global economy, and that should still support RSBL gold.

Triggers expected to drive a rally in gold prices

 Gold lately has seen quite a lot of volatility. Last week we saw gold being the best performing precious metal, while this week it opened on a negative note.

The dip in Treasury yields last week helped boost the appeal of the non-interest-bearing metal suggested RSBL, one of the top gold dealers in India. Gold then stabilized later in the week as the dollar and Treasury yields pared some of their gains made in the wake of U.S. inflation data that came in significantly higher than expected. Prices paid by U.S. consumers surged in June by the most since 2008, topping all forecasts and testing the Federal Reserve’s commitment to sticking with ultra-easy monetary support for the economy.

Last week, the yellow metal found some life after Powell's testimony pushed back on recent hawkish pricing, while central banks and physical buyers also helped prop up markets. But, even as macro growth angst catalysed a re-pricing in expectations for Fed hikes, gold still could not catch a bid.

Gold fell below the psychological $1,800 an ounce level as-

• The U.S. new home sales missed expectations in June with a fall of 6.6%. The prior month’s number was also revised down. 
• New home sales were at a seasonally adjusted annualized rate of 676,000 homes in June, the U.S. Commerce Department said on Monday.
• May’s sales were revised down to a rate of 724,000 units from 769,000.
• The market consensus called for sales to advance to 800,000 units in June.
• On an annual basis, new home sales were down 19.4% from last year’s estimate of 839,000 units.

Gold ticked down following the data release, falling into negative territory. The gold market isn't able to break free of $1,800 an ounce as it is stuck and waiting for a new catalyst.

When evaluating the gold market one of the primary drivers of gold’s perception as a store of value is interest rates. There are two ways to look at interest rates. The nominal interest rates, which is the headline interest rates such as the 10 year Treasury Yields, and real interest rates Treasury yields adjusted for inflation. As inflation rises and Treasury Yields remain the same or move lower, real interest rates decline. This reduces the cost of holding a non interest bearing investment such as gold. Currently, real interest rates in US are negative. Therefore, the opportunity cost of holding gold is minimal, or to some, actually demonstrating a better return profile than cash or Treasuries.

Analysts at RiddiSiddhi Bullions Limited opined that, historically, gold prices typically rise as real or inflation-adjusted Yields fall deeper and faster into negative territory. Gold price have struggled in 2021. Interest rate experiences have reset higher in February. However recently interest rates have declined to the lowest level in five months. And monthly CPI data has increased. Therefore, real interest rates have moved significantly lower. Using the core CPI data analysed at 4.5% and the 10 year yield of 125 basis points, real interest rates is now running at -3.25%. In theory this should serve as a tailwind for gold prices

While a slower global growth profile, matched with transitory inflation, should keep Fed tightening at bay and eventually provide a beneficial environment for gold, risks remain in the near term. Given that gold's recent underperformance against slumping real rates continues to suggest a lack of investor interest, and consolidation of current market pricing that may result in higher real and nominal rates could still send prices lower.

Investors might have to wait until September to see how the next recovery phase unfolds. A new wave of the COVID-19 virus is sweeping through the U.S- , if the virus continues to spiral out of control, putting the recovery at risk, and then he would expect to see renewed interest in gold.

The triggers working in favour of gold price rally in the long-term are rising concern of global inflation that seems to be persisting further and increasing number of Covid-19 cases, which includes the delta variant cases in the US, some European nations and South-East Asian countries. Outlook for gold is still bullish and any dip in gold price should be seen as an opportunity by yellow metal.