Heavy Decline in gold prices- Unlikely

 What a year it’s been world over. Financial markets have swung from all-out bullishness to maximum bearishness. Most asset classes- equities. Bonds, crypto-coins, commodities (ruling out energy) have fallen by a fifth or more from their highs.  In such a situation gold should have been shining and how. But dollar, monetary policies, inflation and rate hikes have dampened the bullish sentiments for the yellow metal.
Bullion prices plummeted this year, recently hitting an over two-year low as rising yields drove up the opportunity cost of holding gold. The metal has largely lost its safe-haven status this year, and also appears to have failed as an inflation hedge.
“With U.S. inflation staying stubbornly high this year, rising interest rates are expected to pressure bullion prices in the near-term” says the largest bullion dealers in India.
 
 
Gold has tumbled from above $2,000 an ounce in March to around $1,650 as the U.S. Federal Reserve and other central banks raised interest rates rapidly to tackle inflation.
Higher rates pressured gold by lifting returns on other assets such as government bonds and the dollar that compete with gold for investment
 
And this was very well witnessed in the current week by gold dealers in India.
The precious metal quickly tumbled during Powell's press conference, which followed Fed's decision to raise rates by 75 basis points for the fourth time in a row. The latest hike means that the Fed has already raised rates by 375 bps since March, bringing the key policy rate to a range between 3.75%-4%.
Gold prices fluctuated in a narrow range on Thursday, following a volatile session after US Federal Reserve Chair Jerome Powell tamped down on expectations of a policy pivot saying it was “premature to discuss pausing”.
Gold lost all gains, post-Fed statement, as Chair Jerome Powell signalled that the "ultimate level" of interest rates would likely be higher than previously thought. He also said the window for a soft landing has "narrowed."

Spot gold rose as much as 1.3% after the release of the policy statement at the end of the two day meet. However the price rise dampened post Powell’s remarks.

Powell said that even though a slowdown in rate hikes might happen in December or February, the U.S. central bank is likely to take rates higher than previously thought. "At some point … it will become appropriate to slow the pace of increases as we approach the level of interest rates that will be sufficiently restrictive to bring inflation down to our 2% goal," he said. "We still have some ways to go. And incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected."

Powell also acknowledged that the window for a soft landing has "narrowed" as monetary policy has become more restrictive this year. "The inflation picture has become more and more challenging over the course of this year," he said. "That means that we have to have policy be more restrictive, and that narrows the path to a soft landing."
Although gold is considered a hedge against inflation, higher US interest rates increase opportunity cost of holding the non-yielding asset and this further boosts the dollar.
During the press conference, Powell hinted that rate increases could be less aggressive from now on. According to him, the critical question becomes not how fast but how high to raise the policy rate and how long to keep it elevated.
Another hawkish point was that it was still premature to think about a pause in rate hikes, with the December meeting expected to reveal how high the Fed might raise rates thus strengthening the dollar and pushing gold down further.

But one positive outcome of all these events will be will be the old trading mantra- BUY ON DIPS.
“Well then it’s obvious that any dip in prices of the yellow metal will result in a surge in its demand and people are more likely to buy it given the uncertain times that lie ahead. Hence gold won’t be under a strong impact thus a heavy decline in its prices is not expected.” is predicted by the top gold dealers in India at RiddiSiddhi Bullions Limited.

Global Recession

 This year has seen a correction in the gold price, corresponding with rising interest rates/ bond yields, and the spectre of more to come. The precious metal has also been hammered by a strong US dollar, which is negatively correlated to the gold price.

Spot gold has fallen from $1,801.40 at the start of the year, to $1,666.45 currently, a drop of 8%. On Sept. 15, gold plunged to its lowest level since April, 2020, on expectations of a 0.75% interest rate increase by the Federal Reserve, which happened on Sept. 21.
Were almost nearing the end of 2022 and this year the largest bullion dealers in India have seen that Gold has been sensitive to geopolitical risks, US dollar, inflation and rate hikes.

GEOPOLITICAL RISK- gold has always been relative to geopolitical risks. During times of crisis and uncertainties, it proves to be a safe haven asset. In a report published on 25 June 2022, The Economist pointed the historical relation between gold food, fuel price inflation and political unrest.
INFLATION- Escalating food and fuel prices have led to political violence and supported gold in the past. Drops in living standards and resultant unrest have had adverse impacts on financial markets, ending up supporting gold. Political violence – even if it does not result in a change of government – has added to economic dislocation. Social disorder has deterred both direct and portfolio investments, says the top gold dealer in India. This has reduced GDP, weakened equity markets and boosted safe-haven buying in gold. Although gold may still be more sensitive to monetary policy and US dollar levels than overall inflation, food and energy- in certain circumstances- may nonetheless exert influence in bullion.

INTEREST RATE HIKE- According to the vast majority of economists, a fed funds rate of 5% or higher would have a devastating effect on the economy. It would be negative for stocks and earnings and lead to more selloffs in bonds. It could in essence shut down the ability for loans to be granted from individual loans such as mortgages or loans to corporations.
Even more worrisome is there are some economists expecting fed funds rates to rise to 6% at some point. The repercussions could easily aggravate and accelerate a global recessionary scenario creating a major disruption in the global economy.
Bullion dealers in India say, “the sad truth is that this scenario could have been avoided had the Federal Reserve acted on rising inflation in 2021. While they certainly were not responsible for the black swan event that was a pandemic leading to a recession, they are completely responsible for not acting in an efficient and reasonable time when it was quite evident in 2021 that inflation was beginning to spiral out of control.”
This helps reaffirm the views of RiddhiSiddhi Bullions Limited that while gold prices are most likely headed lower as a consequence of tightening monetary policies, more moderate fiscal policies and a strong US dollar, these likely losses should be tempered and measured. In our view, geopolitical risks and food and energy increases, as well as strong retail coin and bar demand, will moderate any potential price declines
DOLLAR- The main culprit making things challenging for gold is the hotter-than-expected inflation forcing the market to re-price the aggressive Federal Reserve rate hike expectations. And that is giving the U.S. dollar an additional boost. The USD’s relationship with gold has strengthened recently. This is likely to put pressure on gold, as further rate hikes should see the USD continue to strengthen. The wildcard is central banks defending their currencies by selling US Treasury bonds. That would be an upside risk to our view.
Gold dealers in India are being warned the gold market could continue to struggle through year-end as higher interest rates support the US dollar. The longer the Fed continues on its current path, the longer that a strong dollar will depress the gold price

Rising geopolitical and economic risks are having limited impact on haven buying. Instead, investors continue to seek protection in the USD. Investment flows have been negative for the last two quarters. This could continue with exchange traded funds (ETF) as elevated holdings still leave room for further liquidation. Nevertheless, lean investors’ positioning in futures looks less of a concern.

In medium term there's greater chance for gold to go higher than lower. We're going to see negative outcomes in the economies globally, which could eventually tip the scales in favour of rate cuts.