Global Recession

 This year has seen a correction in the gold price, corresponding with rising interest rates/ bond yields, and the spectre of more to come. The precious metal has also been hammered by a strong US dollar, which is negatively correlated to the gold price.

Spot gold has fallen from $1,801.40 at the start of the year, to $1,666.45 currently, a drop of 8%. On Sept. 15, gold plunged to its lowest level since April, 2020, on expectations of a 0.75% interest rate increase by the Federal Reserve, which happened on Sept. 21.
Were almost nearing the end of 2022 and this year the largest bullion dealers in India have seen that Gold has been sensitive to geopolitical risks, US dollar, inflation and rate hikes.

GEOPOLITICAL RISK- gold has always been relative to geopolitical risks. During times of crisis and uncertainties, it proves to be a safe haven asset. In a report published on 25 June 2022, The Economist pointed the historical relation between gold food, fuel price inflation and political unrest.
INFLATION- Escalating food and fuel prices have led to political violence and supported gold in the past. Drops in living standards and resultant unrest have had adverse impacts on financial markets, ending up supporting gold. Political violence – even if it does not result in a change of government – has added to economic dislocation. Social disorder has deterred both direct and portfolio investments, says the top gold dealer in India. This has reduced GDP, weakened equity markets and boosted safe-haven buying in gold. Although gold may still be more sensitive to monetary policy and US dollar levels than overall inflation, food and energy- in certain circumstances- may nonetheless exert influence in bullion.

INTEREST RATE HIKE- According to the vast majority of economists, a fed funds rate of 5% or higher would have a devastating effect on the economy. It would be negative for stocks and earnings and lead to more selloffs in bonds. It could in essence shut down the ability for loans to be granted from individual loans such as mortgages or loans to corporations.
Even more worrisome is there are some economists expecting fed funds rates to rise to 6% at some point. The repercussions could easily aggravate and accelerate a global recessionary scenario creating a major disruption in the global economy.
Bullion dealers in India say, “the sad truth is that this scenario could have been avoided had the Federal Reserve acted on rising inflation in 2021. While they certainly were not responsible for the black swan event that was a pandemic leading to a recession, they are completely responsible for not acting in an efficient and reasonable time when it was quite evident in 2021 that inflation was beginning to spiral out of control.”
This helps reaffirm the views of RiddhiSiddhi Bullions Limited that while gold prices are most likely headed lower as a consequence of tightening monetary policies, more moderate fiscal policies and a strong US dollar, these likely losses should be tempered and measured. In our view, geopolitical risks and food and energy increases, as well as strong retail coin and bar demand, will moderate any potential price declines
DOLLAR- The main culprit making things challenging for gold is the hotter-than-expected inflation forcing the market to re-price the aggressive Federal Reserve rate hike expectations. And that is giving the U.S. dollar an additional boost. The USD’s relationship with gold has strengthened recently. This is likely to put pressure on gold, as further rate hikes should see the USD continue to strengthen. The wildcard is central banks defending their currencies by selling US Treasury bonds. That would be an upside risk to our view.
Gold dealers in India are being warned the gold market could continue to struggle through year-end as higher interest rates support the US dollar. The longer the Fed continues on its current path, the longer that a strong dollar will depress the gold price

Rising geopolitical and economic risks are having limited impact on haven buying. Instead, investors continue to seek protection in the USD. Investment flows have been negative for the last two quarters. This could continue with exchange traded funds (ETF) as elevated holdings still leave room for further liquidation. Nevertheless, lean investors’ positioning in futures looks less of a concern.

In medium term there's greater chance for gold to go higher than lower. We're going to see negative outcomes in the economies globally, which could eventually tip the scales in favour of rate cuts.

Bullions could be in for more volatility

 Just last week we were discussing the opportunities ahead that would makes gold  strong in the near future. And here it is! Finally gold moved on to the upside and there was complete turn of tables as gold once again witnessed safe haven buying.

For RiddhiSiddhi Bullions Limited, there was enough evidence to prove that gold was definitely here to stay. Once again, it has proved its worth as a safe haven asset in times of uncertainty and also as a hedge against inflation. Strong reversal signs from U.S. and EU markets, the U.S. bond from its peak and the subsequent fall in the USD made markets run on extreme short coverings and extreme over sold zones. This paved way for gold which is expected to scale towards $1732-1735 bracket very soon.

Gold prices jumped more than 2 per cent on Monday boosted by a dip in the US dollar and bond yields, as recent lows enticed investors and also sparked a rally in silver in potentially its best day since late-2008.  

The two precious metals are catching a solid safe-haven bid as the global stock and financial markets remain jittery, as media outlets are focusing on a desperate Russian president that may resort to using nuclear weapons in his war with Ukraine, and amid bullish outside markets that see higher crude oil prices and a weaker U.S. dollar index on this day and not forgetting the geo political and economic crisis.

Fed and Dollar-  Gold soared the most since March, helped by a continued decline in Treasury yields, as traders weighed concerns that central banks’ monetary tightening will lead to recession and the possibility that bond rates may have reached a peak.
Bullion extended its first weekly gain in three weeks, as lower bond rates boosted the appeal of the non-interest bearing asset. Silver gained the most since February 2021 as traders bought back their previously short positions with the dollar and bond yields moving lower. It seems clear that apart from the above mentioned concerns- what’s driving the precious metal right now is the dollar- it continues to remain important remains important for gold prices, although even its impact on the metal appears to have weakened.

Central Banks- Central banks will also continue to support gold prices with their buying
The fact that the Fed and the ECB are leaving interest rates low could provide support for gold alongside weak economic growth. However, gold appears to be in a holding pattern for now and looks strong from here.

Global stock and financial markets and Recession. There are reports and rumours swirling that investment bank Credit Suisse may be in serious financial trouble. If a major global investment bank may be on the verge of collapsing and the dictator of the nation with the most nuclear warheads in the world has his back against the wall, while at the same time major global economies are battling inflation and teetering on recession, it appears increasing numbers of the public are now opting to possess gold and silver. “It will be important for the gold and silver bulls to show follow-through price strength this week, which would then begin to suggest sustained price uptrend, could develop in both metals.” says the top gold dealer in India.

once again, it appears when the heat in the marketplace gets turned up significantly hotter and trader/investor anxiety rises above what could be considered normal or even a bit elevated levels, demand for the safe-haven metals kicks in more aggressively

As mentioned above, there are a number of factors that have influenced precious metals, but we need to see gold and silver in the broader perspective. Comparatively, gold has so far been one of best performing assets in its class in 2022. Gold has outperformed U.S. bonds, foreign bonds, S&P 500, foreign stocks, NASDAQ and US Treasury Inflation Protected Securities (TIPS)

The largest bullion dealers in India are running an hypothesis stating that traders will now look to US jobs data due on Friday for more clues on the future path of central bank monetary policy. That means bullion could be in for more volatility.

Now as geopolitical and recessionary crisis escalate, we will see more and more investors shifting focus to gold as a move of their defensive strategy. Rise in demand of such high quality liquid assets will put gold at the top position per se returns generation in its asset class.