Noisy Challenges ahead for Gold

 Many believe that markets have been behaving very strange lately. But frankly speaking, I did not find this new. This was bound to happen amid rising US dollar and US bond yields. Needless to say, the recession is prevailing in most EU economies and if DOW has tumbled-3500 (-12%) in the past 6 weeks, it got discounted on day to day basis after data releases.

According to the gold dealers in India, “The Pound's crash is showing markets have a lack of confidence in the UK and that its financial strength is under siege.  The UK is now in the midst of a currency crisis. British government bond prices collapsed on Monday, pushing yields to their highest in over a decade with 2-year Gilt yields jumping by more than 50 basis points for a 2nd session running to 4.53%, the highest since September 2008.
 
That means UK bond prices are on track for their biggest slump of any calendar month since at least 1957, according to a Reuters analysis of Refinitiv and Bank of England data.
 
European bond prices also slid on Monday, led lower by Italian sovereign debt, after victory for a coalition led by the Brothers of Italy in the country's snap election, forced by parties across the spectrum pulling their support for former European Central Bank chief Mario Draghi as caretaker premier. There’s a fear that the new actions will add uncertainty to the economy.
 
“The key question will be what does this mean for ultimately weakening the European economy, which is an important consideration for how the U.S. economy is going to perform. The USD surge along with bond yields are at a new decade high, making the recession woes more amplified and asset grinding.” shared the largest Bullion dealers in India.
 
Amidst all this gold too was not spared. Gold prices rose on Tuesday as the dollar slipped, but the metal languished near a 2-1/2-year low on prospects of further rate hikes by the U.S. Federal Reserve to tame soaring inflation. As long the Dollar continues its relentless rise and until the market reaches peak hawkishness and yields start to top out, gold will struggle to act as a defence against stagflation.

As fears of a widespread U.S. recession mount, the global marketplace started Monday in choppy waters. The dollar’s continued strength has been a headache for gold bugs, as the Yuan hit 2008 lows and the British pound sterling was hit by the U.K.’s plan to sell more government bonds in a bid to better their economic growth. The dollar’s advance stalled on Tuesday, providing relief for the non-interest-bearing metal. While gold is seen as a traditional haven in times of economic distress, fears of a global recession stoked by central banks’ monetary tightening have instead triggered big gains in the greenback.

Global stock markets fell for the 15th session in the last 20, while government bond prices also fell again together with most industrial and energy commodities in Dollar terms.

The top gold dealers in India believe that The focus is still on dollar strength, and it could continue to weigh on the precious metal as more rate hikes to tame inflation will dent gold’s safe-haven status.
Gold prices started the week on the defensive amidst shrinking open interest and volume, hinting at the likeliness that further losses look not favoured and therefore a potential rebound could be in the offing. In the meantime, decent contention has so far emerged around the $1,620 level per ounce troy.
The prevailing upside risk to inflation and, hence, monetary policy tightening still remains a key obstacle limiting gold's upside.

Fed officials on Monday sloughed off rising volatility in global markets and said their priority remained controlling inflation. 

Gold prices have declined more than 20% since rising above the key $2,000 level in March, as rapid U.S. rate hikes made the non-yielding bullion less attractive and also pushed the dollar to multi-year highs. 

But there are some who believe otherwise. Even though gold prices have fallen more than $400 since the precious metal broke through a critical $2,000 level in March, some experts are seeing positive signs amid the noisy challenges. 

The gold loyalists believe that the yellow metal could jump in value if the Federal Reserve's campaign of interest-rate hikes fails to crush inflation. Owing to the rate hikes, investors could lose faith in the central bank and their long-term inflation expectations would rise, boosting demand for the metal as a hedge.

This week, the market may face fresh volatility from the release of US inflation data and public speaking engagements by Federal Reserve officials including Vice Chair Lael Brainard and New York Fed President John Williams.

Buy on Dips - the new mantra for gold

 Gold prices rose through the first few months of the year, as investors sought a haven amid the geopolitical chaos unleashed by the war in Ukraine. Credit Suisse analysts said they see central bankers taming inflation through higher interest rates and a shallow recession as being a more likely scenario than a deeper downturn. As a result, they lowered their gold price estimates this year to US$1,725 per ounce from US$1,850 per ounce, and they forecast US$1,650 per ounce in 2023.
 
The yellow metal is now well on track to record its sixth consecutive monthly loss amid a period of high inflation, something that has helped bullion prices in the past but not always. The largest Bullion dealers in India believe that The global fight against inflation in the form of aggressive and simultaneous rate hikes by central banks is raising the risk of a recession and a string of financial crises in 2023, the World Bank said in a report.

Inflation appears out of control for the first time in decades. Stock markets have been pummelled. The shadow of a recession is looming amid rapidly rising interest rates. Russia’s ongoing assault on Ukraine has unleashed chaos on global food supplies, trade and the political order.
 
The gold dealers in Mumbai shared, “All these factors traditionally drive investors to buy gold, a safe store of value for centuries. Yet the prices of gold, along with the equities of gold miners, are in free fall. As gold falls below its support of $1,675thanks to the strengthening dollar that is weighing down the precious metal. Gold and the U.S. dollar often move in opposing directions. The dollar held close to two-decade highs, making green back–priced bullion more expensive for overseas buyers. Traders and investors appear to be favouring the perceived safe-haven greenback and US Treasuries over the precious metals. The dollar has been the biggest weigher on the price of gold along with the Federal Reserve’s rate hikes.
 
Last week, gold fell three per cent to US$1,665 per ounce after the release of data that showed that U.S. inflation hit 8.3 per cent in August, the opposite of what you would have expected given fresh evidence of intense upward price pressure. Gold has now sunk some 20 per cent since hitting US$2,087 per ounce in March. Gold is not an inflation hedge, but rather "a hedge against stagflation" and "a hedge against investors losing faith in government and currencies."

The Federal Reserve has been laser-focused on bringing inflation down to an acceptable level of approximately 2%. However, inflation remains exceedingly hot, and persistent. The CPI index hit a 41-year high in June at 9.5%. The most recent data revealed that inflation remains extremely elevated coming in at 8.3% in August

According to the top gold dealers in India, “Marketplace focus is now on this week’s FOMC meeting that begins Tuesday and ends Wednesday afternoon. The FOMC is generally expected to raise the key U.S. Fed funds rate by 0.75% in the Fed’s effort to tamp down problematic price inflation. However, there is scattered talk the Fed could do a full 1.0 per cent rate hike. One investment bank’s research team said the Fed raising 100 basis points is possible but not likely. The Bank of England also holds its monetary policy meeting later this week. The higher nominal rates coupled with potentially moderating inflation over the coming months (even if still well above the Fed’s 2 per cent target) will likely lead to lower gold prices. This could lead to a spike in demand for the yellow metal as investors would take advantage of “buy on dips. This would probably improve the fundamentals for gold amidst rising political tensions domestically.