Investors in gold are gearing up for the US Federal Reserve’s next move. The Federal Open Market Committee meeting on 19-20 September will play a key role in determining the yellow metal’s fate. It is widely expected that the US central bank will maintain status quo on interest rates this time. There is a likelihood of a rate hike in November.
“On one hand, there are signals that Fed might opt to stay put on rates in September, protecting a downside in gold prices, however, there is still a possibility of one more rate increase, which limits a meaningful upside, at least in the short-term,” said Sugandha Sachdeva, executive director and chief strategist, Acme Investment Advisors.
Amid this, the looming threat of a global recession has stood the US dollar in good stead, making gold a less attractive investment option in the current scenario.
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“Since gold competes with the US dollar as a safe haven investment asset, gold prices could stay subdued in the near-term on firmer US dollar index,” according to Sachdeva.
The US dollar index took a beating on Monday from the highs seen last week. Still, it is up 8.8% since the beginning of 2022.
The US Fed has raised rates by a whopping 525 basis points cumulatively since March 2022.
In the US, the federal funds rate now stands at 5.25-5.50%, the highest since 2001. While, the Fed’s interest rate hiking spree has helped bond yields, for non-interest earning gold, it has been a dampener.
This is despite the latter being often regarded as a hedge against inflation.
“Higher US bond yields and stronger US dollar index are likely to keep steep upside in gold prices capped in the near-term,” said Hitesh Jain, lead analyst at Yes Securities Ltd.
He feels that a reversal in Fed’s monetary policy stance is a key factor that can meaningfully revive gold prices. “As of now, with core inflation in the US still above the Fed’s 2% target, rate cuts are unlikely before mid-2024,” he added.
Little wonder then that the higher interest rates-for-longer narrative has punctured investors’ sentiment towards gold. According to the World Gold Council (WGC), physically-backed gold ETFs experienced net outflows for the third straight month, losing $2.5 billion in August.
In the case of India, domestic gold prices could get some fillip as appetite for gold improves ahead of the festival and wedding season later this year. On Monday, spot gold price in local currency terms on the MCX stood at ₹58,952 per 10 grams, and have risen by 8% so far in 2023. In comparison, international gold prices have risen by 5.56%.
Since India imports most of its gold requirements, domestic gold prices have got support from a weaker Indian rupee.
“Gold prices are likely to remain stuck in a range. Apart from the worries that the US Fed may raise interest rates in November, the weakness in the Euro Zone and China is also keeping a check on gold prices. In the near term, Indian gold prices are likely to be in the range of ₹58,000-60,000 per 10 grams,” said Ravindra Rao, head commodity research at Kotak Securities Ltd.
From a long-term perspective, gold buying by global central banks and a move towards de-dollarisation could aid gold prices. However, geopolitics and a U-turn by the Fed on rates are the near-term catalysts.
So, for now, gold prices are expected to navigate within a range, unless more clarity emerges on Fed’s interest rate outlook.