Last week gold closed above $1900 an ounce for the first time since the start of 2021. This could once again mark the onset of bullish sentiments for the yellow metal. Spot Gold kept firm tone and consolidated under new nearly three-month high ($1912) on Monday, supported by weak dollar while growing inflationary pressures lift gold’s appeal as the metal is used as a hedge against inflation. Moving further, gold prices scaled a near five-month high on Tuesday. This rally was driven by –
Weaker Dollar – The dollar index was down 0.2% against its rivals, making gold less expensive for other currency holders. The U.S. unit registered its second consecutive monthly loss. Broad US dollar weakness became the main catalysts to help the gold post the biggest run-up in 11 months. The US dollar index (DXY) remained on the back foot as hopes of further stimulus and steady vaccinations in the West, recent in Asia as well, improved risk appetite for the metal.
Stimulus – The other supportive factor for the yellow metal is the monetary policy as it remains firmly stable, refusing to start changing the policy in response to rising inflation, arguing that the latest increase in consumer prices is transitory. Having proposed a $6.0 trillion budget, US President Joe Biden stretched talks over his $1.7 trillion infrastructure spending to June even as tax hikes become the key hurdle for the much-awaited stimulus.
Growing Inflationary Pressures – Last week, data showed U.S. consumer prices surged in April, with a measure of underlying inflation blowing past the Federal Reserve’s 2% target. The constant subdued tone around the US dollar, in retort to Fed’s policy expectations, continued to underpin gold price. While investors like Prithviraj Kothari, who is also the bullion king of India, awaited more U.S. data to gauge the extent of global economic recovery, Federal Reserve officials have repeatedly maintained they expect any rise in inflation to be short-lived, and said monetary stimulus would stay in place for some time.
Rising Demand – China’s factory activity expanded at the fastest pace this year in May as domestic and export demand picked up, though sharp rises in raw material prices and strains in supply chains crimped some companies’ production. Rising demand has resulted in pushing gold prices higher.
The true test for gold will be after the next couple of months of hot inflation reports and if we have some surprising better-than-expected nonfarm-payrolls reports, according to Prithviraj Kothari from RSBL.
Friday’s US Nonfarm Payrolls (NFP) will become important catalyst to watch for gold traders as markets for consolidation in the previous month’s disappointment. Should the headline US jobs figures print upbeat figures, traders may have an additional reason to expect the Fed action during the upcoming Federal Open Market Committee (FOMC), which in turn may underpin the US dollar and drag the gold prices. But weak Nonfarm payrolls number this Friday may jolt gold prices toward the $1975 level.
Investors eagerly await Friday’s US Nonfarm Payrolls data for fresh hints on the economic recovery, which would likely affect the Fed’s policy outlook and in turn gold price. In the near-term, if gold can breach the $1,922 per ounce mark, it can open the room for further upside potential.