Will Gold Make Higher Lows Or Higher Highs

The month of volatility is about to end making bullion dealers in India content. March witnessed a lot of ups and downs per se gold and equities. Gold price remains in the red so far this week, much to the chagrin of the gold dealers in Mumbai, as the US Treasury bonds see no reprieve, leading to the relentless surge in the yields. The US dollar is tracking the rates higher, weighing heavily on the gold price. Hopes for progress on the Russia-Ukraine peace talks are boosting the overall market mood, adding to gold’s plight. The incoming updates from the negotiations and sentiment around the US yields will remain the main market drivers ahead of Friday’s critical Nonfarm Payrolls release.

Let us have a detailed look at these key influencers -

• Russian Ruble - Amid all the chaos, the Ruble appreciated from the worst levels of 140 to now 89 against the US dollar in the past 3-4 weeks. Russia reiterated that gas and crude oil selling will be done only in Ruble in the coming times to the West. Though earlier Germany, and now even the G7, rejected the Russian demand to pay in Ruble, amidst brutal war realities. The second round of talks looks inconclusive.
• US Treasury Yields - Gold continues its attempts to settle below the support level at $1915 as rising treasury yields put pressure on precious metals. While the 10-year treasury yields are testing the 2.5% level, short-term yields are rising fast, which is bearish for precious metals like gold and silver. The rise in yields and thus, the increase in real interest rates is due to the higher interest rate expectations of market participants. The Fed Fund Futures are meanwhile pricing in rate hikes of 90 basis points at the next two meetings of the US Federal Reserve. In our view, the gold price is holding its own impressively well against this backdrop.
• Ukraine-Russia talks - The gold price has dropped below $1,920 as Russia and Ukraine negotiators are set to meet in Turkey for a one-on-one meeting. In the absence of any progress, the yellow metal could regain some traction, giving the gold dealers in Mumbai a sign of relief.
• Dollar - The gauge of the dollar climbed to the highest in more than a week, while yields on two-year treasuries surged as much as 14 basis points earlier to lead increases across the curve. Higher rates reduce the appeal of non-interest-bearing gold.
• Speculation - The gold ETFs tracked by Bloomberg registered inflows of 43 tons last week, already their tenth weekly inflow in succession. By contrast, speculative financial investors have withdrawn further from gold, according to the CFTC’s statistics: they slashed their net long positions by 9% to a six-week low in the week to 22 March.
• Shanghai lockdown - The oil prices were knocked back from their latest surge, and many companies were affected as authorities in China put the mega-city of Shanghai into a two-stage coronavirus lockdown after a local tide in cases. On Sunday, the Shanghai officials said they would lock down the city in two stages to carry out widespread Covid testing of the financial and manufacturing hub.

To sum it up, we can say that Gold is an inflation barometer, and Russian sanctions and retaliatory response are bullish for many commodity prices, fuelling the economic condition. Moreover, removing Russian gold production and holdings from the global financial system via the G7’s latest sanctions limits supplies.

Russia can still use its domestic gold reserves and production for transactions with China and other countries that have not sanctioned Russia. However, the increased sanctions will limit Russia’s liquidity options for its over $130 billion in gold holdings. Gold looks set to continue its path of higher lows and higher highs.

Pool Of Factors Pushing Gold High

Continued high inflation along with an increase in geopolitical tensions set the stage for gold's climb this year. Gold prices are set to spiral to a new high this year as investors seek haven during an uncertain time worsened by Russia's invasion of Ukraine. Gold is often used by investors and bullion dealers in India as a hedge against inflation.

Safe-haven flows were witnessed to be built up for gold because Ukraine officially rejected the deadline from Russia. Ukraine on Monday rejected Russian calls to surrender the port city of Mariupol, where residents are besieged with little food, water and power and fierce fighting showed little sign of easing. Ukraine's crisis didn’t show any signs of abetment, which resulted in an upwards movement in gold prices.

The war in Ukraine has already caused a terrible human toll. We see it extracting a heavy economic price as well, mostly via higher energy costs. This is a major supply shock layered onto an existing one, and we see it resulting in higher inflation and lower growth, especially in the euro area. This puts central banks in a bind: Trying to contain inflation will be more costly, and they can’t cushion the growth shock.

Investors and bullion dealers in India have also been closely watching the U.S. Federal Reserve, which on Wednesday raised interest rates for the first time since 2018 by 25 basis points. The Fed Chairman Jerome Powell has made it clear that the Fed will cautiously raise rates to avoid triggering a U.S. recession. This cautious stance has only increased in the wake of the Ukraine invasion.

Time and again, we have seen that the prices of gold and gold coins in Mumbai frequently go up simultaneously with interest rate increases. And the same behaviour was witnessed when the Fed raised rates nine times between December 2015 and December 2018, with gold rising 17%, and when the Fed raised rates 17 times between June 2004 and June 2006, with gold going up 57%.

The current inflation figures coupled with geopolitical tensions have resulted in the hoarding of gold. The demand for gold bars and gold coins in Mumbai have risen tremendously from the entire investor community and other financial institutions. The current environment is so uncertain, given the ongoing COVID-19 pandemic, that investors have continued to hoard gold.

Inflows into gold-backed exchange-traded funds (ETFs) are rising globally. According to the World Gold Council, global gold ETFs drew net inflows of 35.3 tons in February. Inflation and interest rates remained critical drivers for gold; hot CPI prints in the U.S. and Europe earlier in the month confirmed that inflation shows little sign of abating. But amidst the rising volatility coupled with geopolitical tensions in Ukraine dominating headlines, the demand for gold outweighed the impact of higher nominal yields and a marginally higher US dollar.

We expect the gains to continue until we reach a settlement regarding the Ukraine issue, which right now seems a long way distant. So, it would not be wrong to say that there is a pool of factors that are collectively pushing gold high - Inflation, pandemic, geopolitical tensions, Inflows into ETF and global demand.