Will Gold Make Higher Lows Or Higher Highs

The month of volatility is about to end making bullion dealers in India content. March witnessed a lot of ups and downs per se gold and equities. Gold price remains in the red so far this week, much to the chagrin of the gold dealers in Mumbai, as the US Treasury bonds see no reprieve, leading to the relentless surge in the yields. The US dollar is tracking the rates higher, weighing heavily on the gold price. Hopes for progress on the Russia-Ukraine peace talks are boosting the overall market mood, adding to gold’s plight. The incoming updates from the negotiations and sentiment around the US yields will remain the main market drivers ahead of Friday’s critical Nonfarm Payrolls release.

Let us have a detailed look at these key influencers -

• Russian Ruble - Amid all the chaos, the Ruble appreciated from the worst levels of 140 to now 89 against the US dollar in the past 3-4 weeks. Russia reiterated that gas and crude oil selling will be done only in Ruble in the coming times to the West. Though earlier Germany, and now even the G7, rejected the Russian demand to pay in Ruble, amidst brutal war realities. The second round of talks looks inconclusive.
• US Treasury Yields - Gold continues its attempts to settle below the support level at $1915 as rising treasury yields put pressure on precious metals. While the 10-year treasury yields are testing the 2.5% level, short-term yields are rising fast, which is bearish for precious metals like gold and silver. The rise in yields and thus, the increase in real interest rates is due to the higher interest rate expectations of market participants. The Fed Fund Futures are meanwhile pricing in rate hikes of 90 basis points at the next two meetings of the US Federal Reserve. In our view, the gold price is holding its own impressively well against this backdrop.
• Ukraine-Russia talks - The gold price has dropped below $1,920 as Russia and Ukraine negotiators are set to meet in Turkey for a one-on-one meeting. In the absence of any progress, the yellow metal could regain some traction, giving the gold dealers in Mumbai a sign of relief.
• Dollar - The gauge of the dollar climbed to the highest in more than a week, while yields on two-year treasuries surged as much as 14 basis points earlier to lead increases across the curve. Higher rates reduce the appeal of non-interest-bearing gold.
• Speculation - The gold ETFs tracked by Bloomberg registered inflows of 43 tons last week, already their tenth weekly inflow in succession. By contrast, speculative financial investors have withdrawn further from gold, according to the CFTC’s statistics: they slashed their net long positions by 9% to a six-week low in the week to 22 March.
• Shanghai lockdown - The oil prices were knocked back from their latest surge, and many companies were affected as authorities in China put the mega-city of Shanghai into a two-stage coronavirus lockdown after a local tide in cases. On Sunday, the Shanghai officials said they would lock down the city in two stages to carry out widespread Covid testing of the financial and manufacturing hub.

To sum it up, we can say that Gold is an inflation barometer, and Russian sanctions and retaliatory response are bullish for many commodity prices, fuelling the economic condition. Moreover, removing Russian gold production and holdings from the global financial system via the G7’s latest sanctions limits supplies.

Russia can still use its domestic gold reserves and production for transactions with China and other countries that have not sanctioned Russia. However, the increased sanctions will limit Russia’s liquidity options for its over $130 billion in gold holdings. Gold looks set to continue its path of higher lows and higher highs.