Buy on Dips - the new mantra for gold

 Gold prices rose through the first few months of the year, as investors sought a haven amid the geopolitical chaos unleashed by the war in Ukraine. Credit Suisse analysts said they see central bankers taming inflation through higher interest rates and a shallow recession as being a more likely scenario than a deeper downturn. As a result, they lowered their gold price estimates this year to US$1,725 per ounce from US$1,850 per ounce, and they forecast US$1,650 per ounce in 2023.
 
The yellow metal is now well on track to record its sixth consecutive monthly loss amid a period of high inflation, something that has helped bullion prices in the past but not always. The largest Bullion dealers in India believe that The global fight against inflation in the form of aggressive and simultaneous rate hikes by central banks is raising the risk of a recession and a string of financial crises in 2023, the World Bank said in a report.

Inflation appears out of control for the first time in decades. Stock markets have been pummelled. The shadow of a recession is looming amid rapidly rising interest rates. Russia’s ongoing assault on Ukraine has unleashed chaos on global food supplies, trade and the political order.
 
The gold dealers in Mumbai shared, “All these factors traditionally drive investors to buy gold, a safe store of value for centuries. Yet the prices of gold, along with the equities of gold miners, are in free fall. As gold falls below its support of $1,675thanks to the strengthening dollar that is weighing down the precious metal. Gold and the U.S. dollar often move in opposing directions. The dollar held close to two-decade highs, making green back–priced bullion more expensive for overseas buyers. Traders and investors appear to be favouring the perceived safe-haven greenback and US Treasuries over the precious metals. The dollar has been the biggest weigher on the price of gold along with the Federal Reserve’s rate hikes.
 
Last week, gold fell three per cent to US$1,665 per ounce after the release of data that showed that U.S. inflation hit 8.3 per cent in August, the opposite of what you would have expected given fresh evidence of intense upward price pressure. Gold has now sunk some 20 per cent since hitting US$2,087 per ounce in March. Gold is not an inflation hedge, but rather "a hedge against stagflation" and "a hedge against investors losing faith in government and currencies."

The Federal Reserve has been laser-focused on bringing inflation down to an acceptable level of approximately 2%. However, inflation remains exceedingly hot, and persistent. The CPI index hit a 41-year high in June at 9.5%. The most recent data revealed that inflation remains extremely elevated coming in at 8.3% in August

According to the top gold dealers in India, “Marketplace focus is now on this week’s FOMC meeting that begins Tuesday and ends Wednesday afternoon. The FOMC is generally expected to raise the key U.S. Fed funds rate by 0.75% in the Fed’s effort to tamp down problematic price inflation. However, there is scattered talk the Fed could do a full 1.0 per cent rate hike. One investment bank’s research team said the Fed raising 100 basis points is possible but not likely. The Bank of England also holds its monetary policy meeting later this week. The higher nominal rates coupled with potentially moderating inflation over the coming months (even if still well above the Fed’s 2 per cent target) will likely lead to lower gold prices. This could lead to a spike in demand for the yellow metal as investors would take advantage of “buy on dips. This would probably improve the fundamentals for gold amidst rising political tensions domestically.

The gold price tested the $1,800 mark for the first time in over a month on Tuesday

While we give credence to the recent uptrend action in gold and silver, we now see the potential for a top. Gold prices steadied on Friday and were on track for their fourth consecutive weekly gain, as broader weakness in the dollar countered pressure from an uptick in the Treasury yields and prospects for US interest rate hikes. “Fundamentally gold is facing conflicting factors here. On one hand, we have a weaker US dollar helping, but the other side of the equation is of course the rise in yields.” said top gold dealers in India.

“On the other hand, do not underestimate the importance of bringing inflation under control and continuing to tamp down recession fears through less aggressive rate hikes as that could remove macro-economic headwinds for many commodities” shared gold dealers in Mumbai.  

Let's take a look at the conflicting factors affecting gold-

Weakening US dollar- The dollar was set for its third weekly loss in four, making gold less expensive for other currency holders. [USD/] . Gold has struggled to make significant headway despite the correction in both the U.S. dollar index and the easing in the 10-year U.S. treasury bond yield," said independent analyst Ross Norman.

The dollar index weakened, making bullion appealing to overseas investors

Interest Rate Hike- U.S. benchmark rates are currently between 2.25% to 2.5%. Their comments offset optimism over an unexpected fall in U.S. producer price inflation in July, data showed on Thursday. This came after reading on Wednesday showed U.S. consumer price inflation remained static through July, after rising exponentially earlier in the year. Gold prices retreated on Friday, as hawkish comments on interest rate hikes by the Federal Reserve outweighed optimism over signs of cooling U.S. inflation.

But overnight comments from Fed officials on the path of policy tightening kept investors uncertain over future interest rates. Data on Thursday showed U.S. producer prices unexpectedly fell in July. It came a day after news that consumer prices (CPI) were unchanged in July due to a drop in gasoline prices.

Inflation - "With U.S. inflation data now behind us, it is almost like the calm after the storm and that has led to tight ranges for currencies and commodities after a spell of volatility a couple of days ago. Fed funds futures traders are now pricing in a 61.5% chance of a 50-basis-point hike in September and a 38.5% chance of a 75-basis-point increase. Gold is highly sensitive to rising U.S. interest rates, as these increase the opportunity cost of holding non-yielding bullion. Weighing on gold by increasing the opportunity cost, benchmark U.S. 10-year Treasury yields hovered near a three-week peak.

However, Fed policymakers noted that they would continue to tighten monetary policy until price pressures were fully broken. U.S. Data- the number of Americans filing new claims for unemployment benefits rose for the second straight week, indicating further softening in the labour market despite still tight conditions as the Federal Reserve tries to slow demand to help tame inflation.

The U.S. economy unexpectedly contracted in the second quarter, with consumer spending growing at its slowest pace in two years and business spending declining. The second straight quarterly decline in gross domestic product largely reflected a more moderate pace of inventory accumulation by businesses as job gains overall have stayed strong.