Is Gold Heading To Regain Its Safe Haven Appeal

Since the early 1980s, the major factor that has driven gold prices for decades were growing debt, negative interest rates and market instability. Inflation wasn’t of really much concern. Gold jumped from under $300/oz in the early 2000s to over $2,000/oz last year and has since hovered around $1,800/oz, much to the chagrin of the gold dealers in India. Meanwhile, Christian noted, the correlation between inflation and gold has been low in the past couple of decades, and at times negative, though it may be making a tentative return.

Gold prices went on a volatile ride during November, rising toward USD 1,900 per troy ounce (oz) in the early stages of the month, as official inflation rates in the United States topped 6% year on year. The precious metal was unable to hold onto these gains, with gold plunging more than USD 100oz in a couple of days after Jerome Powell was confirmed to serve another term as the Chair of the U.S. Federal Reserve.

Despite the intra-month swings, gold ended the month up 2% and has now climbed more than 100 US dollars (+7%) since the lows seen in late March 2021. This sharp rise in the yellow metal has fuelled speculation about bullion re-emerging as investors’ haven in the wake of Omicron virus concern, making it a good day for the bullion dealers in India,. According to commodity market experts following are the main reasons that are rerating a demand for gold and silver -

• Rising Global Inflation - With inflation hitting multi-decade highs this year, investors have started to reconsider gold as an inflation hedge, and some analysts have boosted their near-term forecasts on the back of rising prices.
• Asset Purchase - Fed policymakers look likely to accelerate the wind-down of their asset purchases when they meet later this month as they respond to a tightening labour market and move to open the door to earlier rate hikes than they had projected. So, the gold and silver price may further scale northward if the Omicron virus cases continue to rise further for a longer time, giving a sigh of relief to the gold dealers in India.
  Gold prices held steady on Monday as market participants weighed the prospect of a faster ending to pandemic-era asset purchases by the U.S. Federal Reserve after data suggested the labour market was rapidly tightening.
• Data - The U.S. employment growth slowed considerably in November, but the unemployment rate plunged to a 21-month low of 4.2%. After a turbulent week in gold and the U.S. equities, the markets were hit with a mixed employment report from November. Despite the big miss in the headline number, the details were quite optimistic. The latest data showed the U.S. economy only adding 210,000 jobs last month versus the expected 535,000.
• Interest Rates - Reduced stimulus and interest rate hikes tend to push government bond yields up, raising the opportunity cost of non-interest bearing gold.
• Economic Collapse - The IMF is warning of “economic collapse”, which should get headlines. Not because the IMF have any kind of track record of being timely or right about anything, but because the Fund so rarely says anything negative for fear of being seen as precipitating the crises which the policies it imposes always end up creating anyway.
• Omicron Virus - As fears mount over the newly identified coronavirus variant - Omicron, governments all over the world are scrambling to protect their citizens from a potential outbreak. The new mutation, being potentially more transmissible, was first discovered in South Africa and has since been detected in Australia, the United Kingdom, Germany, Israel, Italy, the Czech Republic, and Hong Kong.

Many events are happening around the world, and many more are to come. Of these, the ones that need to be closely watched -

• The U.S. inflation data on 10th December.
• FED FOMC interest rate decision on 15th December.
• An RRR cut from China. China Securities Daily says a cut could come as soon as this month.
• K. ministers announce new COVID-19 restrictions for travellers entering the U.K.
• Biden and Putin to have a phone call this Tuesday (one for the diary).
• Japan PM Kishida says to shorten the waiting period between vaccine and booster shot.
• Swiss National Bank (SNB) vice-chairman Zurbrügg to step down at the end of July 2022.
• The U.S. to fast-track revamped vaccine in the battle against omicron.
• Germany October factory orders -6.9% vs. -0.5% m/m expected.

As these uncertainties continue to grip the markets, will gold be able to find its safe-haven appeal once again?

Inflationary Pressure Continues

Gold prices bounced back on Wednesday, holding near their highest levels since June, as the worry of inflation continues to push investors toward the safe-haven metal. Gold prices jumped by more than $50/oz for multiple reasons, but yes, mainly inflation, exciting and satisfying the top gold dealers in India. Let’s have a look at the key events that have occurred and are most likely to transpire soon -

• Yields - The U.S. 10 year yields surged again beyond 1.60%. The benchmark U.S. 10-year Treasury yields recorded a modest climb on Thursday but retreated from a three-week high hit during the previous session. An auction of the 20-year bonds was also disappointing.

• Rate Hike - On Tuesday, Treasury Secretary Janet Yellen extended the potential U.S. Government's deadline default from Dec 3 to Dec 15. This deadline allows Congress more time to raise the federal debt ceiling as lawmakers also consider massive social spending and climate bill. Most Fed Voices now reassured that - to combat inflation, an emergency route for interest rate hike cannot be ruled out. The rate hike has always been a major influence on gold, which is a good thing for the top gold dealers in India.

• Bond Buying - In the near term, the reductions in the purchase of signal assets may be speeded up to fight inflation or if the market believes rates would rise sooner than anticipated. The U.S. central bank began phasing out its bond-buying this month and expects to end purchases altogether by mid-2022. The U.S. Federal Reserve will only complete asset tapering in mid-2022, Chicago Fed President Charles Evans said on Wednesday. However, the central bank will continue to monitor whether record-high inflation levels will come down as he expects, Evans added. The wind-down of its bond-buying program will not be completed until the middle of next year, even if the central bank checks whether high inflation eases.

• CPI - The latest U.S. inflation data showed a sharply higher CPI for October with a headline rate of 6.2%, the highest in over three decades. Across the Atlantic, a jump in U.K. inflation in October raised expectations that the Bank of England will hike interest rates in December. The consumer price index grew a higher-than-expected 1.1% month-on-month and 4.2% year-on-year.

• Inflation - The market participants are focusing on the real threat of spiralling inflation, that economies are facing globally. The U.K. reported that inflation has now hit a 10-year high. In the U.S., the current inflation level is at a 31-year high, coming in at 6.2%. Mexico currently has an inflation rate of 6.24%, and many South American countries are running double-digit inflationary levels, such as Argentina (52.1%), Brazil (10.67%).

The underlying support for gold and silver remains the inflationary pressures we continue to see in the market. Currently, we cannot be sure where gold is heading because uncertainty levels are very high. There is no clarity related to the U.S. Dollar's performance and the likely response of the U.S. Fed and other central banks to inflation.

Bullion, considered a hedge against inflation, has gained on the back a surge in consumer prices in the U.S. and Europe, making the bullion dealers in India super happy. But that has also bolstered bets for early interest rate hikes, which would increase the opportunity cost of holding non-yielding gold. Until the Fed signals an accelerated taper, gold should hold its current $1,850 and $1,875 range.

Based upon our economic recovery occurring at a much more prolonged period than originally anticipated and the vast amounts of government capital that have been used to aid in that recovery, it is no wonder that market participants have once again focused upon the safe-haven asset that for hundreds of years have kept up with inflation, which is gold.