Key Drivers For Gold

 Last week was terrible for gold and gold dealers in India as it witnessed a 6.04% dip. This decline followed the comments released by the Fed. Fed’s hawkish stance spurred a new wave of concerns about tapering. However, prices stabilized at around $1,770 on Monday as the US Dollar dropped slightly from its two-month high. Some investors may take this opportunity to buy the dips, but uncertainties surrounding the Fed’s next interest rate move may continue to weigh on the prices.

The spot price of gold on RiddiSiddhi Bullions Limited reached $1,787.80 (£1,286) per ounce early on Tuesday morning, up 0.3% from where it rested at the close of play on Monday. Gold steadied after posting the biggest weekly loss in 15 months as the Federal Reserve’s hawkish shift damped reflation bets. Gold is attempting a bounce from two-month lows amid falling yields, although a broadly firmer US dollar is likely to limit the rebound.

Gold bears once again became active in the market but couldn’t sustain for long. Following were the key drivers for the yellow metal -

• Inflation - Fed President Bullard said he sees inflation running at 3% this year and 2.5% in 2022, which would meet our new framework where we said we are going to allow inflation to run above the target for some time. From there, we could bring inflation down to 2% over the subsequent horizon. This suggests that conditions may be maturing by the end of 2022 for the Fed to consider tightening, which is much earlier than the market had anticipated.

• Rate Hike - Inflation risks may warrant the US central bank beginning to raise interest rates next year, St. Louis Fed President James Bullard said Friday. His comments came after last week’s Fed meeting where officials signalled monetary policy tightening could start earlier than expected. Chair Jerome Powell further added that the Fed would initiate a discussion about scaling back bond purchases used to support financial markets and the economy during the pandemic. The June FOMC meeting forecasts signalled that two rate hikes are likely by the end of 2023 as economic recovery father’s strength and inflationary pressures intensify. The decision hinted that the Fed would raise interest rates and begin asset tapering earlier than expected.

• Treasury Yield - The benchmark of a 10-year US Treasury Yield fell to its lowest level since Mar 3, 2021. A flattening US Treasury yield curve also seemingly reflects markets attempting to price in the possibility of a 2022 rate hike.

• Dollar - Ultra-low interest rate environment and central banks quantitative easing since the Covid-19 pandemic has been riding gold and a tailwind. Hence, it may be more vulnerable to a pullback when the reverse begins. Although the retreat in the dollar alleviated the sell-off in gold, the near-term momentum may still be tilted to the downside as tapering fears weigh.

It’s clear that the economy is improving rapidly, and the medium-term outlook is very good. But the data and conditions have not progressed enough for the Federal Open Market Committee to shift its monetary policy stance of strong support for the economic recovery. And hence people are using the correction to buy gold from RiddiSiddhi Bullions Limited - the biggest bullion dealers in India, at these price levels; there is value to hold positions in gold, especially for the long run.

Dollar Went Up The Hill And Gold Came Tumbling After

Gold headed towards its biggest decline in five months this week post the FOMC meeting. The FOMC stated that it would speed up its expected pace of policy tightening.

Since the yellow metal is extremely sensitive and influenced by the dollar and interest rate, such a volatile movement was quite obvious. Due to this characteristic, gold suffered a downfall as the dollar and US real yields both reached two-month highs. The central bank kept its interest rates and monthly bond purchases unchanged, as widely expected and concluded the meeting. The Fed on Wednesday signalled it would be considering whether to taper its asset purchase programme meeting by meeting and brought forward projections for the first post-pandemic interest rate hikes into 2023.

Following hawkish comments from Fed officials, the dollar jumped to a two-month high and was on track for its best week in nearly nine months. On the other hand, gold prices fell below $1800 an ounce on Thursday in London, disconcerting the largest bullion dealers in India. The yellow metal witnessed its 7th worst-ever trading day after the US Federal Reserve spooked the bond, equity and commodity markets by signalling an earlier rise in interest rates than previously forecast, leading in turn to expectations that its QE bond-buying will start to 'taper' sooner than later.

This uncertainty (especially in the forex markets) has led to a steep fall in gold and gold coin prices in Mumbai. The Federal Reserve has disrupted the summer torpor that the markets had settled into by signalling on Wednesday that two rate hikes could be in the cards by the end of 2023, a year earlier than expected. Though gold is considered as a hedge against inflation, higher interest rates will reduce its appeal as they translate into a higher opportunity cost of holding the metal.

The haven appeal of gold took a beating earlier this week on the release of the FOMC statement which indicated interest among a majority of committee members to expect rate hikes to begin as soon as 2023, amid a rapid economic recovery underway. This helped the US dollar, as well as bond yields, climb higher, further exerting pressure on the yellow metal, weakening interest in it among investors.

Just when people were about to write off gold, it managed to rise on Friday. At the time of writing, gold is trading at a little above $1,785. There is no doubt that the strengthening of the dollar will be challenging for gold, but looking at the other macro factors, we feel that gold and gold coins in Mumbai should be able to withstand rising yields as long as it is driven by rising inflation expectations. That was, however, not what we saw yesterday, so once again the million-dollar question is whether inflation will be a passing phenomenon or longer-lasting.

Despite the current high-growth, inflationary environment, the proposed Fed rate hikes are not expected to set in for at least another 18 months. So after a little bit more weakness here, gold prices will regroup and push higher.

Global commodity markets look set to undergo a major change in tone over the coming quarter as the rampant gains that have characterized the pandemic era give way to a more muted performance. Looking ahead, continued dollar strength will pose a challenge while gold should be able to withstand rising yields as long as it is driven by rising inflation expectations.

For now, the market including the largest bullion dealers in India trusts the judgement of the Federal Reserve and until data potentially proves them wrong, gold and with that also silver may face another challenging period.