Gold- Near & Long Term

It’s a roller coaster ride, all the way up especially when a falling USD suddenly sparks a pullback which further sends the metals into spiralling mode. Alongside the metals we saw a large unwind! However, bullion dealers in India noticed that the 1% jump in USD caused -2 to- 3% cuts in gold and silver on Monday, 5th December in the late trading sessions.  A constantly improving data and positive numbers from the US leaves an impression that the Fed’s effort to cool down economy by calibrating interest rate hikes, does stand a partially achieved step only. Having said that, the USD Index showed an uptick along with US Bond yields and marred the Tech and Metal sectors in Asia Markets.

The price of gold advanced after Federal Reserve Chair Jerome Powell signalled the pace of tightening would slow at the next meeting, ahead of economic data that could bear on the central bank's future rate hikes. The gold market, seeing a solid breakout from last month's two-year lows, appears to be getting comfortable around $1,780 an ounce; however, one bank is warning investors that gold's recovery looks fragile.  There is a risk gold prices retest supports at $1,750 an ounce and in spite of this rally, there is some hesitancy in the marketplace.
Investors – big and small, continued to liquidate their holdings in gold-backed exchange-traded products.
Giant gold-backed investment fund the SPDR Gold Trust yesterday saw shareholder liquidation for the 3rd session running, shrinking the world's largest gold ETF by 0.5% since last Wednesday

Gold is still in danger of falling lower and giving up its recent gains, but the longer-term outlook is more constructive as the Federal Reserve shifts from tightening to easing next year.
Gold has been seeing head-turning gains in November and the beginning of December, but the rally has a high chance of fizzling out as the U.S. central bank is still raising rate
But looking into next year, largest bullion dealers in India predict that things might begin to shift for the precious metal, which has been battered down by this year's strong U.S. dollar and higher yields.
Global economic uncertainty and heightened geopolitical tensions will create a "worldwide war economy" that prioritizes domestic supplies and price caps, ensuring that inflation will remain persistently high through 2023.

The tone of the gold market is getting more positive as Jerome Powell signalled the pace of rate hikes would slow at the Fed's next meeting. In some ways, the market has taken the lead from the Fed. In November, gold gained 8% with talk of Covid loosening in China, but the dollar lost 5% in conjunction with a rise in gold and some anticipation that the Fed can't keep raising rates this fast. We had a major blow up with the crypto space, and now Blackstone's $69 billion real estate fund for wealthy individuals announced it is limiting redemption requests on the fund as total requests to liquidate exceed the threshold withdrawal limits. Gold is beginning to get interesting as other investment returns look less certain.

Higher for longer consumer prices, improvement in Chinas economy, pumping liquidity into the global financial markets by the central banks (owing to the great recession), will drive gold prices dramatically high says gold dealers in India at RiddiSiddhi Bullions Limited.

As well as being an inflation hedge, gold will also remain an attractive asset for nations looking to further reduce their exposure to the U.S. dollar.  
Gold is still in danger of falling lower and giving up its recent gains, but the top gold dealer in India can assure you that the longer-term outlook is more constructive as the Federal Reserve shifts from tightening to easing next year

Markets wait for 2022 to end on a positive note

 “Gold ticked higher on Monday as a retreat in the dollar made bullion more attractive for other currency holders, drawing further support from some safe-haven demand from China amid wide protests over its strict COVID-19 curbs.” says the top gold dealer in india.
 
The US markets fell on Monday post the sudden hawkish comments released by the Fed and also the ongoing unrest in China. But on Tuesday morning there were reports that China State Council will have a press conference to hopefully call off the zero Covid policy. This created a direct and positive impact ion Hong Kong and Shanghai markets, noted by bullion dealers in India.
If the China COVID situation does not come under control and the crisis gets worse then it could be positive for the gold market.
On one hand we have the escalating crisis in China and on the other hand we have hawkish Fed comments. Both these are acting as opposite drivers for the yellow metal.
Gold prices slipped from a more than one-week high on Monday, as the dollar rose from session lows on hawkish comments from members of the U.S. Federal Reserve reiterating their fight against inflation.
Various members of the Federal Reserve have been extremely vocal about upcoming interest rate hikes. One of the more hawkish Federal Reserve members is the St. Louis Fed President James Bullard. Last week he commented on the need for the Federal Reserve's benchmark rate to go as high as 7% to deal with lowering inflation. This week speaking to Greg Robb an editor at Market Watch when asked a question about how long expects the fed funds rate will need to remain in the 5% to 7% range, he said that "the Federal Reserve will likely need to keep its benchmark policy rate north of 5% for most of 2023 and into 2024 to succeed in taming inflation.

Spot gold last fell 0.86% to $1,740.557 per ounce, after hitting its highest since Nov. 18 earlier in the day. U.S. gold futures settled down 0.8% at $1,740.3.
The dollar turned positive after falling to a near two-week low earlier in the session. A stronger dollar makes greenback-priced metals more expensive for other currency holders.
Fed Presidents James Bullard and John Williams stated that there was a long way to go to fight inflation, with Bullard stating that rates should be held high “throughout next year and into 2024.”

But a very strange or rather bizarre trend being witnessed in some of the leading economies (excluding US) is the reduced dollar dependency.
This has been highlighted even more post the Russian –Ukraine War.
West sanctions against Russia are backfiring, particularly fir the US dollar, which is slowly but surely losing its grip on global dominance.
After witnessing western nations unilaterally freeze Russia’s foreign assets in response to Moscow’s military operation in Ukraine, largest bullion dealers in India noticed that central banks have been boosting their gold reserves so the same thing doesn’t happen to them should Washington suddenly turn unfriendly. Over $300 billion of Russian foreign reserves— not including assets owned by businesses and individuals— were frozen by the Biden administration and other western allies
 
China and Russia are allies with the former closely associated with the World Economic Forum, whose plans to implement the Chinese social credit system globally are well advanced.
On the other hand, social unrest, inflation, disrupted supply chain and food supplies etc have created pressure on the dollar and its importance as a world currency has depleted.
If this continues to happen, the U.S. will no longer be able to exchange piles of intrinsically worthless paper for the goods and services produced by the rest of the world and will rapidly become a banana republic, kind of like Haiti but without the mild winter climate. China and Russia have been moving toward this goal for many years, which is why they have been accumulating vast quantities of gold at knockdown prices in preparation for the day when they will launch a gold-backed currency that will see the dollar might lose its significant hold at astonishing speed.
They have been waiting for the right moment, and with the Fed doubling the number of dollars in existence every few years now, that time is believed to have arrived. The imminence of this may explain why the dollar tanked this month.
But this data is not being supported by strong evidence and we can do nothing but wait for concrete facts. Meanwhile some important data coming up-
 
Jerome Powell is due to speak at a Brookings Institution event on Wednesday, on the outlook for the U.S. economy and the labour market
U.S. non-farm payroll data for November is due on Friday, which might shift expectations around the Fed’s policy move in December. Traders currently anticipating a 50-basis-point rate hike.

Keeping fingers crossed, we at RiddiSiddhi Bullions Limited hope global markets to end 2022 on a positive note, thus benefiting the max.

Heavy Decline in gold prices- Unlikely

 What a year it’s been world over. Financial markets have swung from all-out bullishness to maximum bearishness. Most asset classes- equities. Bonds, crypto-coins, commodities (ruling out energy) have fallen by a fifth or more from their highs.  In such a situation gold should have been shining and how. But dollar, monetary policies, inflation and rate hikes have dampened the bullish sentiments for the yellow metal.
Bullion prices plummeted this year, recently hitting an over two-year low as rising yields drove up the opportunity cost of holding gold. The metal has largely lost its safe-haven status this year, and also appears to have failed as an inflation hedge.
“With U.S. inflation staying stubbornly high this year, rising interest rates are expected to pressure bullion prices in the near-term” says the largest bullion dealers in India.
 
 
Gold has tumbled from above $2,000 an ounce in March to around $1,650 as the U.S. Federal Reserve and other central banks raised interest rates rapidly to tackle inflation.
Higher rates pressured gold by lifting returns on other assets such as government bonds and the dollar that compete with gold for investment
 
And this was very well witnessed in the current week by gold dealers in India.
The precious metal quickly tumbled during Powell's press conference, which followed Fed's decision to raise rates by 75 basis points for the fourth time in a row. The latest hike means that the Fed has already raised rates by 375 bps since March, bringing the key policy rate to a range between 3.75%-4%.
Gold prices fluctuated in a narrow range on Thursday, following a volatile session after US Federal Reserve Chair Jerome Powell tamped down on expectations of a policy pivot saying it was “premature to discuss pausing”.
Gold lost all gains, post-Fed statement, as Chair Jerome Powell signalled that the "ultimate level" of interest rates would likely be higher than previously thought. He also said the window for a soft landing has "narrowed."

Spot gold rose as much as 1.3% after the release of the policy statement at the end of the two day meet. However the price rise dampened post Powell’s remarks.

Powell said that even though a slowdown in rate hikes might happen in December or February, the U.S. central bank is likely to take rates higher than previously thought. "At some point … it will become appropriate to slow the pace of increases as we approach the level of interest rates that will be sufficiently restrictive to bring inflation down to our 2% goal," he said. "We still have some ways to go. And incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected."

Powell also acknowledged that the window for a soft landing has "narrowed" as monetary policy has become more restrictive this year. "The inflation picture has become more and more challenging over the course of this year," he said. "That means that we have to have policy be more restrictive, and that narrows the path to a soft landing."
Although gold is considered a hedge against inflation, higher US interest rates increase opportunity cost of holding the non-yielding asset and this further boosts the dollar.
During the press conference, Powell hinted that rate increases could be less aggressive from now on. According to him, the critical question becomes not how fast but how high to raise the policy rate and how long to keep it elevated.
Another hawkish point was that it was still premature to think about a pause in rate hikes, with the December meeting expected to reveal how high the Fed might raise rates thus strengthening the dollar and pushing gold down further.

But one positive outcome of all these events will be will be the old trading mantra- BUY ON DIPS.
“Well then it’s obvious that any dip in prices of the yellow metal will result in a surge in its demand and people are more likely to buy it given the uncertain times that lie ahead. Hence gold won’t be under a strong impact thus a heavy decline in its prices is not expected.” is predicted by the top gold dealers in India at RiddiSiddhi Bullions Limited.

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.

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.

The gold price tested the $1,800 mark for the first time in over a month on Tuesday

While we give credence to the recent uptrend action in gold and silver, we now see the potential for a top. Gold prices steadied on Friday and were on track for their fourth consecutive weekly gain, as broader weakness in the dollar countered pressure from an uptick in the Treasury yields and prospects for US interest rate hikes. “Fundamentally gold is facing conflicting factors here. On one hand, we have a weaker US dollar helping, but the other side of the equation is of course the rise in yields.” said top gold dealers in India.

“On the other hand, do not underestimate the importance of bringing inflation under control and continuing to tamp down recession fears through less aggressive rate hikes as that could remove macro-economic headwinds for many commodities” shared gold dealers in Mumbai.  

Let's take a look at the conflicting factors affecting gold-

Weakening US dollar- The dollar was set for its third weekly loss in four, making gold less expensive for other currency holders. [USD/] . Gold has struggled to make significant headway despite the correction in both the U.S. dollar index and the easing in the 10-year U.S. treasury bond yield," said independent analyst Ross Norman.

The dollar index weakened, making bullion appealing to overseas investors

Interest Rate Hike- U.S. benchmark rates are currently between 2.25% to 2.5%. Their comments offset optimism over an unexpected fall in U.S. producer price inflation in July, data showed on Thursday. This came after reading on Wednesday showed U.S. consumer price inflation remained static through July, after rising exponentially earlier in the year. Gold prices retreated on Friday, as hawkish comments on interest rate hikes by the Federal Reserve outweighed optimism over signs of cooling U.S. inflation.

But overnight comments from Fed officials on the path of policy tightening kept investors uncertain over future interest rates. Data on Thursday showed U.S. producer prices unexpectedly fell in July. It came a day after news that consumer prices (CPI) were unchanged in July due to a drop in gasoline prices.

Inflation - "With U.S. inflation data now behind us, it is almost like the calm after the storm and that has led to tight ranges for currencies and commodities after a spell of volatility a couple of days ago. Fed funds futures traders are now pricing in a 61.5% chance of a 50-basis-point hike in September and a 38.5% chance of a 75-basis-point increase. Gold is highly sensitive to rising U.S. interest rates, as these increase the opportunity cost of holding non-yielding bullion. Weighing on gold by increasing the opportunity cost, benchmark U.S. 10-year Treasury yields hovered near a three-week peak.

However, Fed policymakers noted that they would continue to tighten monetary policy until price pressures were fully broken. U.S. Data- the number of Americans filing new claims for unemployment benefits rose for the second straight week, indicating further softening in the labour market despite still tight conditions as the Federal Reserve tries to slow demand to help tame inflation.

The U.S. economy unexpectedly contracted in the second quarter, with consumer spending growing at its slowest pace in two years and business spending declining. The second straight quarterly decline in gross domestic product largely reflected a more moderate pace of inventory accumulation by businesses as job gains overall have stayed strong.

Gold gives it best Over 5 weeks

Both gold and silver prices have spiked dramatically higher over the last two weeks and accelerated their upward momentum over the last two days as per the gold dealers in Mumbai. Gold and silver prices have moved to new multiweek highs in response to two major events that have confirmed what the American public has been acutely aware of for some time. Firstly,

Recession- The outlook has darkened significantly since April. The world may soon be teetering on the edge of a global recession, only two years after the last one. Multilateral cooperation will be key in many areas, from climate transition and pandemic preparedness to food security and debt distress. Amid great challenges and strife, strengthening cooperation remains the best way to improve economic prospects and mitigate the risk of geoeconomics fragmentation.

These latest reports indicate that the Federal Reserve's aggressive rate hikes have been ineffective in reducing “headline” and core inflation. Recent rate hikes by the Federal Reserve have taken the Fed funds rate from near zero to 2.25% leading to only one major accomplishment if you can call it that. They have effectively contracted the U.S. economy for the last two consecutive quarters.

It is emphatically clear that the United States economy has met the definition of a recession regardless of what the government wants us to believe. Therefore, yesterday and today's extremely robust move in both gold and silver were highly warranted and long overdue. 

Interest rate hike- after Fed is done with consecutive hikes of 0.75%, the markets now await PPE data which, for the month of July, is expected to be +0.5%. with US advance GDP data. There was a late rally in US markets which otherwise were flat during Friday. Gold emerged to be a winner after Fed Powell’s first word. These are the significant time for traders to capture unusual profits.

The US Federal Reserve on Wednesday raised interest rates by 75 basis points to 2.25-2.5% as markets expected. Fed Chair Jerome Powell sounded less hawkish in his press conference, saying the final rate hike decision at the September meeting will be determined by the incoming economic data

The global economy, still reeling from the pandemic and Russia’s invasion of Ukraine, is facing an increasingly gloomy and uncertain outlook. Many of the downside risks flagged in our April World Economic Outlook have begun to materialize.

Higher-than-expected inflation, especially in the United States and major European economies, is triggering a tightening of global financial conditions. China’s slowdown has been worse than anticipated amid COVID-19 outbreaks and lockdowns, and there have been further negative spillovers from the war in Ukraine. As a result, global output contracted in the second quarter of this year.

Dollar creates a strong impact worldover

In the past year, we have seen the dollar strengthening massively. The US dollar has been on a major surge against leading global currencies. Recently the dollar hit levels that it had not seen in the past 20 years. It has gained 15 % against the British Pound, 16% against the Euro, and 23% against the Japanese Yen.

The dollar is the world's reserve currency, which means it is used in most international transactions. As a result, any change in its value has a significant impact on the entire global economy.

In such volatile markets, 3 main questions that come to our mind are-

Why has the dollar strengthened?

What impact is it creating?

What next?

Answering the first question- Well there are two main reasons- Economic and Geopolitical-:

ECONOMIC- The Central bank of the US- The Federal Reserve- has been hiking interest rates aggressively and also reserving its policy of creating money by Quantitative Easing (QE). This is to curb inflation caused by Covid supply issues, the war in Ukraine, and QE. The stronger US dollar is a side effect of these higher interest rates. Because the dollar now offers a higher yield when deposited in a US bank, it encourages foreign investors to sell their local currency and buy US dollars.

Geopolitical (Dollar Parity)- the other reason for the surging US dollar is because it is a classic haven when the world is worried about a recession- and the current geopolitical situation is arguably making it still more appealing. The Euro has suffered from the European Union's proximity to the war in Ukraine, its exposure to Russian energy, and the prospect of another Eurozone crisis. It is close to dollar parity for the first time since its early years.

IMPACT?

A rising US dollar will have the following impact

1. High Inflation- Petrol and most commodities are usually traded in US dollars. So, these items tend to get expensive in the local markets as they are priced against the dollar.
2. The threat faced by low-income countries- Many developing countries owe their debts in US dollars, hence the amount they owe now is much more.
3. Bigger US trade deficit- Since goods priced in the US dollar will get expensive, other countries won’t buy them resulting in a bigger trade deficit for the US economy,
4. Fears in the Euro Zone- the strong US dollar is creating pressure on the European central banks to raise their interest rates to prop up and subdue the cost of imports including energy, thus putting more pressure on the Eurozone.
5. Breaking Precious Metals and Equities market- Furious mega rise in USD at 22 years high at 108.3. the single reason that global equities and metals are under stress despite -20% to even -35% deep cuts. Already seen in just six months.-NASDAQ slipped more than 2% on Monday, 11th July with DOW and DAX remaining weak. Gold and silver started breaking Monday’s low and they may exhibit more weakness causing the largest bullion dealers in India to face the consequence as the dollar surge continues.

WHAT NEXT

Strength in the dollar makes greenback-priced gold by some of the largest bullion dealers in India, more expensive for buyers holding other currencies. It is difficult to predict the future direction of the US dollar especially when there are so many moving parts in the world economy.

Looking forward, fears of an economic slowdown appear crucial support, and hence chatters surrounding the same will be important to track ahead of important data releases from the US.

Investors Are Optimistic About Gold

In the previous session, gold prices were tailored into a tight range as investors and bullion dealers in India were caught up between pressure from prospects of higher interest rates and support from recession risks. While the bull camp can periodically seize control, the gold market has been unable to throw off a recent pattern of lower highs and lower lows, and more importantly, prices have not shown a definitive bullish sensitivity to the classic bullish developments.

With gold periodically lifted by economic uncertainty, yesterday's stronger-than-expected US durable goods readings tampered with uncertainty and likely caused some long liquidation yesterday. Going forward, seeing positive US economic data released on the tail of the solid and durable goods report potentially rekindling widespread expectations of a 75-basis point rate hike next month and would likely prompt a fresh wave of long liquidation/fresh selling in gold and silver. Therefore, gold and silver remain under a liquidation watch.

The price of the yellow metal has been mostly rangebound for June, which has made for shorter-term two-way business between the final weeks of the month between $1,848 and $1,820 in the main. However, rather than rebounding from down here, the price is starting to eat into liquidity below with bulls checked by gains in the US dollar and inflationary pressures that are running at a 40-year high. Higher US yields, as a consequence, are detrimental to the yellow metal since gold does not offer investors and bullion dealers in India any yield.

That said, the gold traders and gold dealers in India should keep their eyes on the monetary policy discussions among the central bankers from the US, the UK, and the European Union (EU) at the ECB Forum seem for a fresh impulse. The US Core Personal Consumption Expenditure (PCE) for Q1 2022, expected to remain unchanged at 5.1%, could entertain traders.

The US Federal Reserve policymakers promised further rapid interest-rate hikes to bring down high inflation on Tuesday. Still, they pushed back against growing fears among investors, gold dealers in India, and economists whose sharp higher borrowing costs will trigger a steep downturn.

Although gold is seen as an inflation hedge, higher interest rates and bond yields raise the opportunity cost of holding bullion, which yields no interest. It is worth noting that the latest weakness in the macro data joins inflation fears and geopolitical tussles surrounding Russia and China to amplify the risk of economic slowdown.

After peaking at the more tremendous highs from earlier in the year, gold prices have now been weighed down by a strong US dollar. But markets continue to remain optimistic and expect the gold price to rise by the end of the year- thanks to high inflation, ongoing geopolitical tensions, and the threat of recession. So, hopefully, gold awaits to enter the bulls by the end of 2022.

Everything Is Down & So Is Investor Confidence

Fed’s Powell has never been so elaborative where he sounds cautious on future job markets and added comments on the US economy and inflation prospects on globalization. He also stressed on a reverse theme, which means the global trade (inter-country) might shrink going forward, and factors may be running war with China. Later, the Fed’s Evan released a strong statement stating, “witness a slowing pace of hikes to 0.25% steps before December” - maybe all these helped recede the USD index at 103.4.

Precious metals could continue to struggle as the US dollar trades around its highest level in 20 years, much to the chagrin of the gold dealers in Mumbai. The widening gap in global monetary policy, with the Federal Reserve leading the charge on interest rate hikes, is supporting the US dollar’s current rally. There are growing expectations that the Federal Reserve will raise interest rates by 50-basis points at the next three monetary policy meetings.

By Wednesday/Thursday, the US markets sank to almost CY 2022 lows. This nasty fall in US Dow -1200 overnight, after leading a pivotal fall from -6% to -28% in a single day, (Walmart, Tesla, Target, Apple etc.) add this fall. It continued as Fed members commented on the interest rates going forward. The notable Mr Harker said - "0.50% in June and 0.50% in July policy, only then the Fed will achieve the 2% target inflation".

Most of the policy thinkers in G-7 are brainstorming on averting stagflation, recession, and how to deal with hyperinflation. Still, the equity markets are witnessing a real carnage as liquidity support has been withdrawn (Earlier stimulus and now balance reduction across). Amidst all this, a hope from China to open up in June as they mention allowing more business options in zero covid areas. This should act as a booster for most base metals, following suit, silver will not lag, giving the  gold dealers in Mumbai a sigh of relief.

Gold is bouncing from the lows of $1800, but the overall trend still is bearish, according to the largest gold dealers in India. A small bounce might be because gold prices are trading near an oversold region, but investors are reluctant to take long positions when fundamentals point to lower prices. The rally in the US dollar and treasury yields is providing a lid on gold prices. The entire premium from the war between Russia and Ukraine has been eroded away, and even if the conflict worsens, we may not see any spike in prices as investors are focused on inflation and higher interest rates.

We see the short-term path of least resistance shifting to gold and silver, as the markets have consistently disappointed the bull camp over the last 30 days. In fact, without the very significant range down the action in the dollar resuming, fresh modest economic optimism and a pause in hawkish Fed dialogue, gold and silver look to stall and chop newly established ranges. However, if pushed into the market, we prefer selling rallies in gold above $1828 and selling rallies above $21.77 in the July sale.

Gold Needs More Time To Settle Down

 With the gold market failing to hold any key support at the $1900 level for a third straight session and the brunt of classic fundamental issues favouring the bear camp, the bias is clearly down. Certainly, inflationary conditions remain under the surface but have been shifted to the back burner, especially with equities and consumer sentiment creating anxiety daily.

The war in Ukraine, China’s economic slowdown, rising inflation and volatile stock markets have all conspired to undermine investor confidence so far this year, much to the chagrin of gold dealers in India and bullion dealers in India. After seeing record inflows in 2020, the gold price languished last year and has yet to make a big splash in 2022. The yellow metal did try to breach the $2000 level in early March and once again around ten days back. However, it has been restricted by expectations the US Federal Reserve will now act quite aggressively to bring inflation under control.

Gold has been holding very well above $1900 much to the happiness of gold dealers in India but has seen pressure from the dollar, and the underlying factor of the Fed is expected to raise interest rates by 50 basis points next week. Benchmark 10-year US treasury yields also stabilised, as investors awaited greater clarity on the “restrictive” policy the Fed plans to pursue next week to combat inflation by curbing economic growth. Gold is highly sensitive to rising US short-term interest rates and higher yields, which increase the opportunity cost of holding non-yielding bullion. However, gold is also seen as a safe store of value during economic and political crises.

We all know that when there is a rate hike, gold losses its lustre, making the bullion dealers in India helpless. And once again, the prospect of further US interest rate hikes adds to the relative attraction of the dollar over real assets like gold that have no yield. Fewer dollars are then required to buy an ounce of gold, reducing its dollar price.

Uncertainty over Russia’s next move in the gold market is another reason for caution. Given that a substantial proportion of Russia’s assets have been frozen, there’s always the possibility some of the country’s gold – understood to be worth around $140 billion – could be sold to make payments.

Events that could further derail shares and bonds include interest rate rises having unforeseen knock-on effects in emerging markets, or another outbreak of international tensions, for example, starting in the South China Sea or Iran. With gold prices falling to push higher despite a backdrop of the Ukraine war and rapid inflation, investors have probably decided to look elsewhere.

The inflation levels for March will be released via the PCE by the BEA this Friday, April 29. These two reports will most certainly be underlying forces affecting the upcoming changes in both - the dollar and gold.

It goes without saying that the upside breakaway in the dollar index adds significantly to the bear case, and it could take a very significant development from the war to spark a fresh flight to quality buying. However, a pre-emptive halt in gas exports by Russia to Poland and Bulgaria should rekindle energy price gains, and in turn, could temper current deflationary vibes.

Having said that, the long-awaited big gold rally could still be on its way. The gold price – currently just under $1900 – has, at least, displayed some stability since the turn of the year. So, it may be all that gold needs a bit more time. Poor returns from shares have unsettled investors recently, and any lack of improvement could spark moves into other asset classes.

Is There Much Upside Potential For Gold?

Gold prices touched the $2,000 per ounce level on Monday morning, much to the happiness of the bullion dealers in India - just a couple of weeks after the yellow metal was entering a deep cavern. There were a series of factors stacking up against the long side of the yellow metal, such as the surging interest rates along with a strong reversal earlier in March.

But the shine didn’t last for long. Gold prices gave up all of their gains over the past few days, saddening the bullion dealers in India and also the gold dealers in India. The drop in gold prices now sees the yellow metal trading back below a confluence of former highs carved out between November 2020 and January 2021, which consequently served as resistance as recently as late February and mid-March. Financial markets were in a tart mood in thin trade at the start of the trading week. World over bourses was closed for the Easter Monday holiday, driving down liquidity. That may have contributed to outsized moves, which could then struggle for follow-through as participation levels are rebuilt.

As for the bullish factors, once again, there was a pool of bearish factors that jointly contributed to dampening gold prices -

●       Treasury Yields - Gold Price hit the lowest level in five days at $1,944, as it extended its correction from six-week highs of $1,998 reached earlier this week. The relentless surge in the U.S. Treasury yields on heightening expectations of faster Fed rate increases smashed the non-interest-bearing XAU/USD. The 10-year benchmark yields clocked over three-year highs of 2.95%, while the actual rates turned positive for the first time since 2020. Since the pandemic began, the U.S. 10-year real yield is about to turn positive for the first time. Historically speaking, as discussed in the 2Q’22 quarterly gold forecast, rising real yields have a negative correlation with gold prices. Further advances by the U.S. real yields will only make the environment more difficult for gold prices, particularly if the geopolitical risk premium embedded in price dissipates if the Russian invasion of Ukraine begins to wind down.

●       U.S. Dollar - The greenback ended the day higher against the majority of its peers on Tuesday partly due to a rally in U.S. treasury yields along with the rise in U.S. stocks.

●       Crude Oil - Gold prices remained under pressure in APAC trading after falling through the U.S. session. A drop in oil prices appeared to soften demand for inflation-indexed bonds, pushing real yields higher. That may be a function of increased confidence in the Federal Reserve’s ability to engineer a soft landing through their rate-hiking cycle.

●       Rate Hike - Meanwhile, the 2022 Fed rate hike path implied the steepening of the future interest rates. 225 basis points (bps) in hikes are now priced in for this year, implying that three of the remaining six policy meetings this year will bring an outsized 50bps increase. The rates are typically adjusted in 25bps increments.

●       Chinese GDP Data - The world’s second-largest economy grew 4.8% y/y in the first quarter of this year, topping the forecast calling for a 4.2% expansion. The retail sales fell by a greater-than-expected 3.5% y/y in March amid the renewed Covid lockdowns. However, the unemployment rates rose.

Those factors bode poorly for gold prices. Gold continues to hold its own against the firm U.S. dollar and high bond yields. Remarks made by representatives of the U.S. Federal Reserve do not appear to be having any impact on gold at present. That seemingly leaves gold prices without much upside potential at the moment, a neutral stance, for the time being, maybe the most fundamentally prudent approach.

 

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.