Gold prices edged higher during Monday’s Asia-Pacific trade, reaching a four-month high of $1,887 before pulling back slightly. Stronger-than-expected US manufacturing and service PMI data released on Friday boosted the inflation outlook and thus bolstered the appeal of precious metals perceived as an inflation-hedge.
Factors that played a key role in influencing gold prices are very much active in these markets. These factors greatly affect Treasury yields and in turn, the treasury yields affect bullish or bearish sentiment in gold.
Dollar Weakness – Since the end of March, the greenback, seen as a safe-haven trade, has retreated steadily with optimism about the recovery. But lately, that move down seems to have slowed down as traders begin to anticipate higher U.S. interest rates coming when the U.S. Federal Reserve reacts to signs of increasing inflation. Any important data becomes important for the US Treasury yields that recently weighed on the US dollar and helped the gold buyers. As a result, Monday’s downbeat figures of the US Chicago Fed National Activity Index backed a corrective pullback of gold.
The US rates fell and dragged the greenback lower after Fed policymaker’s statements. The Fed’s conciliatory remarks boosted the Wall Street indices and capped gold’s upside, as markets once again believed the Fed could maintain lower rates for longer. However, as per Prithviraj Kothari, the bullion king of India, amid a lack of notable US economic news and holiday-thinned trading conditions, gold price stuck to its recent trading range between $1870-$1890.
Inflation – Recently the U.S. Labor Department showed that the consumer price index jumped to 4.2% in April. It is up 2.6% from the numbers revealed in March. Gold steadied near the highest level in over four months as investors weighed comments by Federal Reserve officials who sought to soothe concerns about inflation.
Governor Lael Brainard, Atlanta Fed President Raphael Bostic and St. Louis’s James Bullard said they would not be surprised to see bottlenecks and supply shortages push prices up in coming months as the pandemic subsides and the pent-up demand would be unleashed, but much of those price gains should prove temporary.
Gold is close to erasing this year’s decline as investors turn more bullish on the precious metal, with holdings in bullion-backed exchange-traded funds on an uptrend, says the bullion king of India. While market-based measures of inflation expectations have dipped, traders remain cautious about price pressures as well as flare-ups in Covid-19 cases in some parts of the world.
Bitcoin – We have always seen bitcoin as a reason behind gold’s bearish behaviour. But this time the scenario was completely different. Bitcoin is up nearly 30% for the year but has fallen by almost half from its April record peak of $64,895. The volatility has undermined the case for its mainstream acceptance.
The catalyst for Sunday’s slump was that cryptocurrency “miners,” who mint cryptocurrencies by using powerful computers to solve complex math puzzles, were halting Chinese operations in the face of increasing scrutiny from authorities.
Extreme volatility in the Bitcoin-led cryptocurrencies encouraged traders to look again at gold as capital flows sought safety and stability, Prithviraj Kothari from RSBL voiced his opinion. Investors weighed uncertainties and risks in trading the digital tokens amid doubts surrounding Main Street adoption and regulatory headwinds. Gold offers an alternative to cryptocurrencies for investors who are looking for assets that are non-fiat and therefore cannot be diluted by central bank easing.
Looking ahead, this Friday’s US core PCE inflation data will be closely monitored by traders for clues about rising prices levels and their ramifications for the economy as well as the Fed. Core PCE data is a key inflation gauge that the Federal Reserve uses to determine monetary policy. A higher-than-expected print may intensify inflation fears and drive market volatility.
It should also be noted that the Fed speak, coronavirus (COVID-19) updates and US Treasury yield moves will also be important for near term gold prices forecast. Overall, gold remains on the bull’s radar amid inflation fears.