Dampened Demand For Gold Over Rate Hike

Last week gold ended  with a nearly 0.35% gain at $1,989.65, failing to close above $2,000 throughout the week. Concerns about rising inflation continued after 1Q A core PCE QoQ and 1QA GDP price Index came in higher than expected.

These damp sentiments continued as the week opened. Gold prices moved little in early Asian trade on Tuesday, hovering well below key levels as anticipation of a likely interest rate hike by the Federal Reserve supported the dollar and dented demand for the yellow metal.

Federal Reserve’s policy meeting due in 2-3 May this week remains each investors focus. The Fed is widely expected to deliver another 25 basis point rate hike on Wednesday amid strong US economic data and persistent inflationary pressures. Data showed that US consumer sentiment improved in April, while core PCE inflation exceeded forecasts in March.

But there is uncertainty about rate hikes and markets are not sure whether the central bank will signal a pause in its gold rate hike cycle.

This has kept demand for gold limited, given that rising interest rates push up the opportunity cost of holding non-yielding assets.

Bullion is known as a hedge against inflation and economic uncertainties, but rising gold rates tend to diminish demand for the zero-yielding asset.

Markets were also watching for a potential U.S. debt default, especially as a deadline for the government to raise the debt limit approaches. Treasury Secretary Janet Yellen warned of a potential default by as early as June 1.

Gold has struggled to hold the $2,000 an ounce level for nearly three weeks, as the yellow metal consolidated gains after surging to near-record highs earlier in April.

The short term and near term future of gold , is both uncertain and indecisive 

The next 18 months will be especially risky as the U.S. embarks on the 2024 election season

The political timetable of the election cycle between now and the 2024 elections in the United States and Taiwan will likely lead to more push-the-limit anti-Chinese aggressive foreign policy from the US. 

Fears of the Fed, coupled with a stronger dollar and yields will continue to see limited safe haven demand for gold, even as concerns over a U.S. banking crisis were renewed by the emergency takeover of First Republic Bank.

The future path of the yellow metal is likely to be determined by the Fed’s stance on interest rates,  any new developments in the banking crisis, important decisions before the election campaigns and most importantly the US China ties.  

It's A Big Week For Gold

Gold was going gaga over the ongoing uncertainties globally. There were a host of reasons combined that led to this spike 

Gold, the safest haven amid the ongoing uncertainty, also emerged as one of the most lucrative investment options in financial year 2022-23 with an impressive return of 16.1 per cent in rupee terms, and 2.3 per cent returns in dollars.

Since quite some time we have seen gold rates playing to the moves of either inflation number from US or the Ukraine Russia war. However, there have been a lot of influential factors that have been responsible for the rally in gold prices lately and will continue to do so. 

Effect on Gold rates due to the

Banking crisis- The banking crisis, triggered largely by continuous hikes in the US rates, has led to bleeding bond portfolios and only large banks can survive these losses, the rest could belly up. It has definitely played a key role in gold prices rally and shall continue to do so as many analysts believe that this is just the beginning of a banking crisis.

This scenario will keep safe haven appeal for gold rates

Inflation and gold rate hike - A lot hinges on whether inflation in the US stays above four per cent and the Federal Reserve effectively gives up its target of bringing inflation down to two per cent.

This could happen if there is intense political pressure on the Fed or if the US economy enters recession or suffers a banking crisis.

If the Fed starts cutting the gold rates while inflation is still high, gold may see an accelerated move higher.

Geopolitical - Apart from the ongoing Russia- Ukraine war there are other countries following suit which will definitely benefit gold. If China attacks Taiwan and if the US decides to defend Taiwan, gold prices could shoot up.

On the other hand, if Washington does not defend Taiwan, expect a quick move up and a quick retracement in the price of gold.

Physical demand - The key thing right now is that Russia and China appear to be accumulating reserves in a diversification away from US dollars. That China’s appetite for gold remains insatiable as the latest data from the People’s Bank of China bought 18 tones of gold last month.

China’s gold shopping spree hit its fifth consecutive month

According to many analysts, China’s dominating presents in the precious metal market is completely changing the investment landscape, creating solid value for investors.

Analysts note that China is expected to continue to increase its official gold reserves as it builds international credibility for the yuan. China continues to make important strides as it competes with the U.S. dollar as a world reserve currency. Any kind of physical demand will set gold prices rolling up.

However on the domestic front the recovery gold prices will not rise comparatively for Indian investors as the movement of the dollar-rupee rate is expected to be a key determinant and is likely to limit the gains.

Meanwhile, the volatility will continue if the new US jobs report this week confirms there will be worries ahead for the economy.

It's a big week ahead for Gold!