At present, the odds of an earlier-than-anticipated interest rate cut by the US Federal Reserve are rising. Typically, softer inflation print, lower bond yields and eased US dollar strength are factors that are viewed as pro-gold outlook. Thanks to the latest subdued US economic data, market participants now expect monetary policy loosening to begin in June.
On Monday, gold prices breached the psychological $2100 per ounce mark in the international market. In a rub-off effect, domestic gold price (April contract) on the Multi Commodity Exchange scaled to an all-time of ₹65,140 per 10 grams on Tuesday.
This comes after a strong US dollar and central bank tightening kept gold prices in a consolidation mode lately. Gold is a non-interest-bearing asset, so at a time when borrowing costs are higher, its attractiveness as an investment lessens. But luckily for gold, in a liquidity-driven market and amid ongoing geopolitical tensions, risk-averse investors seem to be taking exposure in the safe-haven asset. Thus, protecting a steep downside in gold prices.
In fact, gold is moving upwards even when its risker counterpart — equity markets have seen record high levels. Theoretically, these assets tend to have an inverse co-relation.
Central banks are said to have played an important role in buoying gold demand of late.
“In the global gold ecosystem, central banks are the top players and they have been buying gold at a record pace, which is keeping the demand for gold intact. Secondly, global gold miners are expected to incur more capex, aggregate trailing 12-months free cash flow is at record high, to meet this demand, which is a positive for prices,” said Ankit Narshana, AVP, Nuvama Professional Clients Group.
Global central banks’ gold reserves rose by 1,000 tonnes for the second successive year in 2023, showed World Gold Council (WGC) data. Central banks have been consistent net buyers on an annual basis since 2010, accumulating over 7,800 tonnes in that time, of which more than a quarter was bought in the last two years, said the WGC statement.
“On the technical front, the implied volatility as indicated by the three-month gold volatility index is hovering near its decadal lows, gold prices could further shoot up if the fear-gauge was to go higher mainly due to geopolitical tensions,” Narshana added.
Further, the uncertainty in a run-up to general elections in India and the US, investors’ risk appetite may get impacted, driving them towards gold.
That said, the US Fed remains a make-or-break factor for gold price trends. In this backdrop, Fed chairman Jerome Powell’s two-day congressional testimony which begins on Wednesday is a crucial event for both equity and commodity markets.
Plus, the US jobs data is also awaited. Any negative surprise in Powell’s comments on interest rate movements could derail the momentum for gold prices in the international market.
“Back home, increased influx of foreign funds, mainly US dollars could lead to rupee appreciation, and could limit the near-term upside in gold to a certain extent,” said Sugandha Sachdeva, founder, SS WealthStreet.
Meanwhile, the investment demand for gold is yet to rebound. Global gold exchange traded funds kicked off 2024 with the eighth monthly outflow in January, led by North American funds, according to WGC data.
The lingering uncertainty around the trajectory of global monetary policies is making investors jittery, prompting them to chase returns in other assets. To conclude, it all boils down to the US Fed as the higher interest rates-for-longer narrative would mean a stronger US dollar and weaker gold prices.