There Is Upside Potential For Gold

 Gold fell $40 last week and had broken the consolidation support band of $1780. USD index rose to 93.25, and the US 10y is 1.37. But September 22, i.e. the coming Wednesday, will be crucial as the Fed will give its verdict at 11.30 PM IST. After Thursday’s $50 slide, gold price looked to stabilize on Friday, although held on to multi-week lows near $1750. The main reasons behind this fall are -

• The US Retail Sales surprised to the upside in August, showing signs of strengthening economy and reinforced Fed’s tapering bets resulting in a fall in gold prices.
• On Friday, the gold price attempted a bounce but lacked conviction amid a broadly firmer US dollar.
• The troubled Chinese property developer giant Evergrande’s potential default story dented the investors’ sentiment and lifted the dollar’s safe-haven appeal. China’s real estate company “Evergrande” is supposedly in a cash crunch with a debt of over $300 billion.
• This company is the most indebted company in the world at the moment, and if it defaults, it will have global ramifications and will cause significant damage to global equities and risk assets.
• The Delta variant of Covid 19 created havoc with 2000 single day deaths.
• While rising Treasury yields on tapering bets also aided the greenback, limiting gold’s upside attempts.

 

However, gold and gold coins in Mumbai managed to sustain the lows and opened with modest gains in early trading hours on Monday in the USA, on some safe-haven demand amid a rough start to the trading week, much to the relief of the gold dealers in India. The reasons behind this recovery are -

• Global stock markets were sharply down in overnight trading.
• The U.S. stock indexes are also pointed to heavy losses and four-week lows when the New York day session begins.
• The cryptocurrencies were getting smacked on Monday, amid the risk aversion and on recent speculation, major countries like the U.S. and China will move to more tightly regulate them.

 

Gold prices were subdued on Tuesday as cautious investors and top gold dealers in India braced for U.S. Federal Reserve’s guidance on tapering its assets and interest rate hikes, while a risk-off sentiment stoked by China Evergrande’s debt crisis limited losses in the safe-haven metal.

Bullion is observed as a hedge against inflation and currency debasement likely to result from the widespread stimulus. A hawkish move by the Fed would diminish gold’s appeal, while an eventual interest rate hike would also raise the opportunity cost of holding the non-interest-bearing asset. All eyes are on whether the Fed will announce that it will begin asset tapering as it hands down its policy decision on Wednesday. The central bank will also release fresh economic projections and a new read on the officials’ expectations vis-a-vis interest rate hikes.

The Fed is likely to give an outlook on how soon and how often they think the economy will need interest rate rises over the next three years at their policy meeting on Wednesday.

Policy decisions by other central banks (Japan, UK, Switzerland, Sweden, Norway, Indonesia, Philippines, Taiwan, Brazil, South Africa, Turkey and Hungary) are also lined up this week. We believe that if gold regains its traditional behaviour, it should rise from these levels and counter the headwinds of moderately rising Treasury yields and inflation cooling a little. Gold is currently underpriced relative to our model forecast. If gold’s behaviour snaps back, there is upside potential for the metal.

Gold Looks Strong From Here

Many arguments have been made in favour of holding gold, including that it offers protection against inflation, is a store of value at times of crisis and is a hedge against stock market volatility. In reality, while gold has exhibited all of these qualities at various points, it has proved to be an unreliable friend. In 2020, for example, its price fell in the second half of the year despite the rising inflation. But, now it seems that the tables are turning over for gold.

Currently, inflation is triggering a mixed response in creating a demand for the yellow metal. Retail investors are snapping up gold coins to protect against inflation, but it isn’t enough to offset the selling in other market domains. The gold dealers in India also witnessed gold hovering around $1800 levels, and it failed to break this strong resistance level.

The data numbers coming in from the U.S. weren’t quite impressive, which signalled that the Federal Reserve might now start tapering units in December. However, the effect it created on gold wasn’t significant. There is portfolio diversification into other assets like crypto, and even though vaccination drivers are in full swing and economies are recovering, gold still finds a good hold in the market and has its loyalty intact. The reasons for this are -

 

• ECB - Analysts were looking ahead to the European Central Bank’s meeting on Thursday for clues about what might happen to the gold price, but the commentary had little effect on the yellow metal. The ECB left interest rates the same and announced that it is trimming its emergency bond purchases but insisted that it isn’t tapering. This had a positive effect on gold, and it didn’t succeed in breaking down the yellow metal.

 

• Delta Virus (Covid 19) - Perhaps the biggest concern for gold prices right now is the Delta variant of Covid-19. Gold prices rebounded as investors and even the bullion dealers in India grew cautious over the COVID impact on the economy after NIAID director Fauci reiterated we are still in the middle of a pandemic. Americans are now getting infected with COVID-19 at 10X the rate needed to end the pandemic. The Fed’s Beige Book showed economic growth is getting rattled by the Delta variant, and that will continue to weigh on the economic outlook that will further strengthen gold.

 

• S. Data - With the CPI data not standing up to expectations, for some that push a possible (taper) announcement a little bit further down the road, and that should be fairly supportive for gold prices. Underlying U.S. consumer prices increased at their slowest pace in six months in August, lending credence to the Fed’s view that high inflation levels were transitory.

The data also raised expectations that the Fed may go slow on unwinding economic support measures and keep interest rates near zero for some time. The U.S. central bank is due to hold its two-day monetary policy meeting next week. Gold tends to gain when interest rates are low, which reduces the opportunity cost of holding non-yielding bullion.

 

• Central Banks - An underlying economic activity incentivise central banks to keep the taps flowing, the key short-term driver of gold prices. The stimulus trade, which is very much active, is also good news for gold. Precious metals will find support as central banks slow their stimulus reductions.

So what’s next?

The above key indicators, clearly state that gold is here to stay. Time and again, it has proved its worth as a safe haven asset in times of uncertainty and also as a hedge against inflation. Central banks will also continue to support gold prices with their buying, benefiting the top gold dealers in India.

It seems clear that apart from the above-mentioned concerns that what is driving the precious metal right now is the dollar. It continues to remain important for gold prices even though its impact on the metal appears to have weakened. The fact that the Fed and the ECB are maintaining lower interest rates could provide support for gold alongside weak economic growth. However, gold appears to be in a holding pattern for now and looks strong from here.