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.