Inflationary Pressure Continues

Gold prices bounced back on Wednesday, holding near their highest levels since June, as the worry of inflation continues to push investors toward the safe-haven metal. Gold prices jumped by more than $50/oz for multiple reasons, but yes, mainly inflation, exciting and satisfying the top gold dealers in India. Let’s have a look at the key events that have occurred and are most likely to transpire soon -

• Yields - The U.S. 10 year yields surged again beyond 1.60%. The benchmark U.S. 10-year Treasury yields recorded a modest climb on Thursday but retreated from a three-week high hit during the previous session. An auction of the 20-year bonds was also disappointing.

• Rate Hike - On Tuesday, Treasury Secretary Janet Yellen extended the potential U.S. Government's deadline default from Dec 3 to Dec 15. This deadline allows Congress more time to raise the federal debt ceiling as lawmakers also consider massive social spending and climate bill. Most Fed Voices now reassured that - to combat inflation, an emergency route for interest rate hike cannot be ruled out. The rate hike has always been a major influence on gold, which is a good thing for the top gold dealers in India.

• Bond Buying - In the near term, the reductions in the purchase of signal assets may be speeded up to fight inflation or if the market believes rates would rise sooner than anticipated. The U.S. central bank began phasing out its bond-buying this month and expects to end purchases altogether by mid-2022. The U.S. Federal Reserve will only complete asset tapering in mid-2022, Chicago Fed President Charles Evans said on Wednesday. However, the central bank will continue to monitor whether record-high inflation levels will come down as he expects, Evans added. The wind-down of its bond-buying program will not be completed until the middle of next year, even if the central bank checks whether high inflation eases.

• CPI - The latest U.S. inflation data showed a sharply higher CPI for October with a headline rate of 6.2%, the highest in over three decades. Across the Atlantic, a jump in U.K. inflation in October raised expectations that the Bank of England will hike interest rates in December. The consumer price index grew a higher-than-expected 1.1% month-on-month and 4.2% year-on-year.

• Inflation - The market participants are focusing on the real threat of spiralling inflation, that economies are facing globally. The U.K. reported that inflation has now hit a 10-year high. In the U.S., the current inflation level is at a 31-year high, coming in at 6.2%. Mexico currently has an inflation rate of 6.24%, and many South American countries are running double-digit inflationary levels, such as Argentina (52.1%), Brazil (10.67%).

The underlying support for gold and silver remains the inflationary pressures we continue to see in the market. Currently, we cannot be sure where gold is heading because uncertainty levels are very high. There is no clarity related to the U.S. Dollar's performance and the likely response of the U.S. Fed and other central banks to inflation.

Bullion, considered a hedge against inflation, has gained on the back a surge in consumer prices in the U.S. and Europe, making the bullion dealers in India super happy. But that has also bolstered bets for early interest rate hikes, which would increase the opportunity cost of holding non-yielding gold. Until the Fed signals an accelerated taper, gold should hold its current $1,850 and $1,875 range.

Based upon our economic recovery occurring at a much more prolonged period than originally anticipated and the vast amounts of government capital that have been used to aid in that recovery, it is no wonder that market participants have once again focused upon the safe-haven asset that for hundreds of years have kept up with inflation, which is gold.

Bullish Momentum For Gold

 Gold ticked to a fresh 2-month high of 1,821 on Monday following the speedy recovery during the past two trading days, which boosted the price by a whopping 2.7%. Gold finally settled near the top end of its daily trading range and touched a fresh two-month high around $1,825 during the Asian session on Tuesday. Overall, markets are looking better by the year-end as the Fed taper announcements are due, and with a $90B bond purchases program per month, and later would be decided in the short term. Gold is at an interesting juncture now, both technically and fundamentally speaking. Here are some of the key factors influencing gold right now - 

• Real yield - Real yields are the bond yield minus inflation. Falling real yields are suitable for gold, and rising real yields are unsuitable. The recent patient stance from the Fed means that the recent surge in the US bond yields can pull back.
• USD - Time and again gold has always been compared with the USD. The US dollar traded lower against all the major currencies on Monday despite a good jobs report and a rise in the Treasury yields. The greenback typically takes its cue from yields, as a brighter outlook for the U.S. economy spurs rate hike expectations which can create demand for the greenback. However, over the past week, we’ve seen the correlation diminish with the dollar completely decoupling from yields in the last 24 hours.

  Remember that although gold is a commodity, the XAUSD often acts as a sort of hybrid between a currency and a commodity. Now, to get the very best opportunities for gold, we also need to see the USD moving in a way that complements gold. The USD has a strong impact on gold as the strength hinders gold, and the weakness of USD helps gold soar higher. A patch of USD weakness and then gold should surge strongly higher into $1900.

  Gold’s seasonal demands are excellent around the end of the year. If you take the time between now and the end of February, you can see that gold has risen 72% of the time in the last 25 years and had an average return of 3.89%. The physical demand for gold often picks up around the end of December. So, the end of December is the best time from a seasonal perspective to purchase gold and gold coins in Mumbai.

• Inflation - The U.S. inflation numbers are due for release this week, and economists are looking for hot numbers that will add pressure on the Federal Reserve to consider rate hikes next year. At the same time, some USD traders are worried that the stickiness of inflation could squeeze consumers in the coming months. Now, this means that real yields should fall as well since inflationary pressures remain the same. This is what has been lifting gold post the Fed interest rate decision.So, this is the key to note. As long as the Fed remains patient on rising inflation rates, then that will support gold and gold dealers in Mumbai.

Prices of gold and gold coins in Mumbai are off the two-month highs but maintain their bullish momentum, as September highs of $1834 remain in sight. Gold price continues to remain underpinned by the market uncertainty over the next policy move by the Fed after Chair Jerome Powell said that they remain patient on rate hikes a week ago. The bright metal remains at the mercy of the dynamics in the US dollar and the Treasury yields, as investors await the US inflation data for the next direction in the gold price.

The chance of gold heading towards $1900-$1915 by the end of the year is high since it weathers $1775-$1800 so well in the past six to eight weeks. Now for the week, the $1800-1850 range is on the cards for extremely short-term traders.

The focus is now on Wednesday’s Consumer Price Index inflation data that could test the Fed’s stance on rate hikes, as tightness in the labour market combined with global supply chain issues could result in another high reading. It also comes on the heels of several Fed officials expressing growing concerns over more persistent price increases. But the Fed vice-Chair Richard Clarida and Chicago Fed President Charles Evans suggested a rate hike was not yet on the cards.

Gold has benefited from near-zero interest rates introduced during the pandemic as they reduce bullion’s opportunity cost. To summarize, the gold dealers in Mumbai expect a push for more gains in the short-term, though whether it will exit its three-month-old range area above $1,833 remains to be seen.