Gold ticked to a fresh 2-month high of 1,821 on Monday following the speedy recovery during the past two trading days, which boosted the price by a whopping 2.7%. Gold finally settled near the top end of its daily trading range and touched a fresh two-month high around $1,825 during the Asian session on Tuesday. Overall, markets are looking better by the year-end as the Fed taper announcements are due, and with a $90B bond purchases program per month, and later would be decided in the short term. According to the bullion king of India, Prithviraj Kothari, gold is at an interesting juncture now, both technically and fundamentally speaking. Here are some of the key factors influencing gold right now –
- Real yield – Real yields are the bond yield minus inflation. Falling real yields are suitable for gold, and rising real yields are unsuitable. The recent patient stance from the Fed means that the recent surge in the US bond yields can pull back.
- USD – Time and again gold has always been compared with the USD. The US dollar traded lower against all the major currencies on Monday despite a good jobs report and a rise in the Treasury yields. The greenback typically takes its cue from yields, as a brighter outlook for the U.S. economy spurs rate hike expectations which can create demand for the greenback. However, over the past week, we’ve seen the correlation diminish with the dollar completely decoupling from yields in the last 24 hours.Remember that although gold is a commodity, the XAUSD often acts as a sort of hybrid between a currency and a commodity. Now, to get the very best opportunities for gold, we also need to see the USD moving in a way that complements gold, suggests the bullion king of India. The USD has a strong impact on gold as the strength hinders gold, and the weakness of USD helps gold soar higher. A patch of USD weakness and then gold should surge strongly higher into $1900.Gold’s seasonal demands are excellent around the end of the year. If you take the time between now and the end of February, you can see that gold has risen 72% of the time in the last 25 years and had an average return of 3.89%. The physical demand for gold often picks up around the end of December. So, the end of December is the best time from a seasonal perspective to purchase gold.
- Inflation – The U.S. inflation numbers are due for release this week, and economists are looking for hot numbers that will add pressure on the Federal Reserve to consider rate hikes next year. At the same time, some USD traders are worried that the stickiness of inflation could squeeze consumers in the coming months. Now, this means that real yields should fall as well since inflationary pressures remain the same. This is what has been lifting gold post the Fed interest rate decision.
Gold price is off the two-month highs but maintains its bullish momentum, as September highs of $1834 remain in sight. Gold price continues to remain underpinned by the market uncertainty over the next policy move by the Fed after Chair Jerome Powell said that they remain patient on rate hikes a week ago. The bright metal remains at the mercy of the dynamics in the US dollar and the Treasury yields, as investors like Prithviraj Kothari await the US inflation data for the next direction in the gold price.
The chance of gold heading towards $1900-$1915 by the end of the year is high since it weathers $1775-$1800 so well in the past six to eight weeks. Now for the week, the $1800-1850 range is on the cards for extremely short-term traders.
The focus is now on Wednesday’s Consumer Price Index inflation data that could test the Fed’s stance on rate hikes, as tightness in the labour market combined with global supply chain issues could result in another high reading. It also comes on the heels of several Fed officials expressing growing concerns over more persistent price increases. But the Fed vice-Chair Richard Clarida and Chicago Fed President Charles Evans suggested a rate hike was not yet on the cards.
Gold has benefited from near-zero interest rates introduced during the pandemic as they reduce bullion’s opportunity cost. To summarize, gold is expected to push for more gains in the short-term, though whether it will exit its three-month-old range area above $1,833 remains to be seen.