Gold Could Possibly Revisit Its Peak

So far 2021, has been a disappointing year for gold and top gold dealers in India. It has failed to attract new buyers despite inflation fears and debt worries. Year-to-date, gold is down more than 7% after selling off at the $1,800 an ounce level multiple times.

Gold rose to another level over COVID concerns. However, the main reason for the gold downfall has been a strong US market. The US stock market has not witnessed a major pullback since the 2020 low. If equities are entering a more sustained wobbling period, we see gold, Treasury bonds and Bitcoin as top contenders for outperformance.

It can also be emphasized that the investments in gold and Bitcoin are viewed as insurance, and not as short-term trades. These are considered to be part of a long-term portfolio that seeks to balance the long-term risks and opportunities in the current global context.

Worries about the debt ceiling are beginning to rattle investors as the deadline nears for Congress to raise the U.S. borrowing limit to avoid a historic default on U.S. debt. After Powell’s stern remarks on the debt ceiling, the DOW plunged to 500 before recovering somewhat. The USD index was 93.7 on low, and gold attempted $1771 an ounce. The FED president, Bullard, says that they are now worried that the inflation crisis is on the upside. After crude hit a 7-year high on Monday, mounting inflations has become a serious concern as natural gas is also at a multi-year high at the moment. It could just be a possibility that the FED’s inflation measure, i.e. PRICE PPE INDEX, may hit above 6-6.6% by year-end, and FED may not be able to do tapering at all. Gold had a good close on October 5, well above $1762, as a result of a critical hurdle after Bullard comment in inflation and subsequent fall in DOW and USD.

The Federal Reserve's potential plan is to reduce its monthly bond purchase by the end of the year continues to weigh on the gold market as prices remain tethered to support around $1,750 an ounce. However, one investment firm continues to see gold prices pushing thousands of dollars higher in the long term.

Gold comex was attempting an elevated bottom above $1740-$1750 bands while on a host of concerns. It is very well in a position to attempt $1785-$1795 before the payroll comes on October 8. The US Senate is under pressure after a stern warning from President Biden as he called for an immediate hike in the debt ceiling before a catastrophe situation emerges for the financial markets.

The recent market movements and bullion dealers in India suggest that investors, after months of ignoring a debt limit standoff, seem to be taking the once-unthinkable possibility of a U.S. default seriously. Today, Congress seems to be locked in a stalemate, with the clock ticking down and a potential debt default looming in October. With this once-unthinkable scenario now becoming more likely, let’s see what a U.S. default would look like for physical gold investors and how they could prepare for it. There could be two possible scenarios -

Scenario 1: If the US debt becomes 'unsustainable' and tops 200% of GDP, then the gold price will go up.

Scenario 2: If the ceiling is raised and the debt-to-GDP ratio goes down, the gold price will hover above the $1,800 level.

If a US default were to happen, it would have major repercussions for the country and the global economy, potentially creating a historic financial crisis. In times of uncertainty, investors usually turn to safe-haven assets like gold to protect their portfolios. So, no matter which way the debt ceiling situation goes, it seems RSBL gold and gold coins in Mumbai should retain their value, offering a haven of safety, as it has done over the centuries.

There Is Upside Potential For Gold

 Gold fell $40 last week and had broken the consolidation support band of $1780. USD index rose to 93.25, and the US 10y is 1.37. But September 22, i.e. the coming Wednesday, will be crucial as the Fed will give its verdict at 11.30 PM IST. After Thursday’s $50 slide, gold price looked to stabilize on Friday, although held on to multi-week lows near $1750. The main reasons behind this fall are -

• The US Retail Sales surprised to the upside in August, showing signs of strengthening economy and reinforced Fed’s tapering bets resulting in a fall in gold prices.
• On Friday, the gold price attempted a bounce but lacked conviction amid a broadly firmer US dollar.
• The troubled Chinese property developer giant Evergrande’s potential default story dented the investors’ sentiment and lifted the dollar’s safe-haven appeal. China’s real estate company “Evergrande” is supposedly in a cash crunch with a debt of over $300 billion.
• This company is the most indebted company in the world at the moment, and if it defaults, it will have global ramifications and will cause significant damage to global equities and risk assets.
• The Delta variant of Covid 19 created havoc with 2000 single day deaths.
• While rising Treasury yields on tapering bets also aided the greenback, limiting gold’s upside attempts.

 

However, gold and gold coins in Mumbai managed to sustain the lows and opened with modest gains in early trading hours on Monday in the USA, on some safe-haven demand amid a rough start to the trading week, much to the relief of the gold dealers in India. The reasons behind this recovery are -

• Global stock markets were sharply down in overnight trading.
• The U.S. stock indexes are also pointed to heavy losses and four-week lows when the New York day session begins.
• The cryptocurrencies were getting smacked on Monday, amid the risk aversion and on recent speculation, major countries like the U.S. and China will move to more tightly regulate them.

 

Gold prices were subdued on Tuesday as cautious investors and top gold dealers in India braced for U.S. Federal Reserve’s guidance on tapering its assets and interest rate hikes, while a risk-off sentiment stoked by China Evergrande’s debt crisis limited losses in the safe-haven metal.

Bullion is observed as a hedge against inflation and currency debasement likely to result from the widespread stimulus. A hawkish move by the Fed would diminish gold’s appeal, while an eventual interest rate hike would also raise the opportunity cost of holding the non-interest-bearing asset. All eyes are on whether the Fed will announce that it will begin asset tapering as it hands down its policy decision on Wednesday. The central bank will also release fresh economic projections and a new read on the officials’ expectations vis-a-vis interest rate hikes.

The Fed is likely to give an outlook on how soon and how often they think the economy will need interest rate rises over the next three years at their policy meeting on Wednesday.

Policy decisions by other central banks (Japan, UK, Switzerland, Sweden, Norway, Indonesia, Philippines, Taiwan, Brazil, South Africa, Turkey and Hungary) are also lined up this week. We believe that if gold regains its traditional behaviour, it should rise from these levels and counter the headwinds of moderately rising Treasury yields and inflation cooling a little. Gold is currently underpriced relative to our model forecast. If gold’s behaviour snaps back, there is upside potential for the metal.