Everything Is Down & So Is Investor Confidence

Fed’s Powell has never been so elaborative where he sounds cautious on future job markets and added comments on the US economy and inflation prospects on globalization. He also stressed on a reverse theme, which means the global trade (inter-country) might shrink going forward, and factors may be running war with China. Later, the Fed’s Evan released a strong statement stating, “witness a slowing pace of hikes to 0.25% steps before December” - maybe all these helped recede the USD index at 103.4.

Precious metals could continue to struggle as the US dollar trades around its highest level in 20 years, much to the chagrin of the gold dealers in Mumbai. The widening gap in global monetary policy, with the Federal Reserve leading the charge on interest rate hikes, is supporting the US dollar’s current rally. There are growing expectations that the Federal Reserve will raise interest rates by 50-basis points at the next three monetary policy meetings.

By Wednesday/Thursday, the US markets sank to almost CY 2022 lows. This nasty fall in US Dow -1200 overnight, after leading a pivotal fall from -6% to -28% in a single day, (Walmart, Tesla, Target, Apple etc.) add this fall. It continued as Fed members commented on the interest rates going forward. The notable Mr Harker said - "0.50% in June and 0.50% in July policy, only then the Fed will achieve the 2% target inflation".

Most of the policy thinkers in G-7 are brainstorming on averting stagflation, recession, and how to deal with hyperinflation. Still, the equity markets are witnessing a real carnage as liquidity support has been withdrawn (Earlier stimulus and now balance reduction across). Amidst all this, a hope from China to open up in June as they mention allowing more business options in zero covid areas. This should act as a booster for most base metals, following suit, silver will not lag, giving the  gold dealers in Mumbai a sigh of relief.

Gold is bouncing from the lows of $1800, but the overall trend still is bearish, according to the largest gold dealers in India. A small bounce might be because gold prices are trading near an oversold region, but investors are reluctant to take long positions when fundamentals point to lower prices. The rally in the US dollar and treasury yields is providing a lid on gold prices. The entire premium from the war between Russia and Ukraine has been eroded away, and even if the conflict worsens, we may not see any spike in prices as investors are focused on inflation and higher interest rates.

We see the short-term path of least resistance shifting to gold and silver, as the markets have consistently disappointed the bull camp over the last 30 days. In fact, without the very significant range down the action in the dollar resuming, fresh modest economic optimism and a pause in hawkish Fed dialogue, gold and silver look to stall and chop newly established ranges. However, if pushed into the market, we prefer selling rallies in gold above $1828 and selling rallies above $21.77 in the July sale.

Gold Needs More Time To Settle Down

 With the gold market failing to hold any key support at the $1900 level for a third straight session and the brunt of classic fundamental issues favouring the bear camp, the bias is clearly down. Certainly, inflationary conditions remain under the surface but have been shifted to the back burner, especially with equities and consumer sentiment creating anxiety daily.

The war in Ukraine, China’s economic slowdown, rising inflation and volatile stock markets have all conspired to undermine investor confidence so far this year, much to the chagrin of gold dealers in India and bullion dealers in India. After seeing record inflows in 2020, the gold price languished last year and has yet to make a big splash in 2022. The yellow metal did try to breach the $2000 level in early March and once again around ten days back. However, it has been restricted by expectations the US Federal Reserve will now act quite aggressively to bring inflation under control.

Gold has been holding very well above $1900 much to the happiness of gold dealers in India but has seen pressure from the dollar, and the underlying factor of the Fed is expected to raise interest rates by 50 basis points next week. Benchmark 10-year US treasury yields also stabilised, as investors awaited greater clarity on the “restrictive” policy the Fed plans to pursue next week to combat inflation by curbing economic growth. Gold is highly sensitive to rising US short-term interest rates and higher yields, which increase the opportunity cost of holding non-yielding bullion. However, gold is also seen as a safe store of value during economic and political crises.

We all know that when there is a rate hike, gold losses its lustre, making the bullion dealers in India helpless. And once again, the prospect of further US interest rate hikes adds to the relative attraction of the dollar over real assets like gold that have no yield. Fewer dollars are then required to buy an ounce of gold, reducing its dollar price.

Uncertainty over Russia’s next move in the gold market is another reason for caution. Given that a substantial proportion of Russia’s assets have been frozen, there’s always the possibility some of the country’s gold – understood to be worth around $140 billion – could be sold to make payments.

Events that could further derail shares and bonds include interest rate rises having unforeseen knock-on effects in emerging markets, or another outbreak of international tensions, for example, starting in the South China Sea or Iran. With gold prices falling to push higher despite a backdrop of the Ukraine war and rapid inflation, investors have probably decided to look elsewhere.

The inflation levels for March will be released via the PCE by the BEA this Friday, April 29. These two reports will most certainly be underlying forces affecting the upcoming changes in both - the dollar and gold.

It goes without saying that the upside breakaway in the dollar index adds significantly to the bear case, and it could take a very significant development from the war to spark a fresh flight to quality buying. However, a pre-emptive halt in gas exports by Russia to Poland and Bulgaria should rekindle energy price gains, and in turn, could temper current deflationary vibes.

Having said that, the long-awaited big gold rally could still be on its way. The gold price – currently just under $1900 – has, at least, displayed some stability since the turn of the year. So, it may be all that gold needs a bit more time. Poor returns from shares have unsettled investors recently, and any lack of improvement could spark moves into other asset classes.