Many arguments have been made in favour of holding gold, including that it offers protection against inflation, is a store of value at times of crisis and is a hedge against stock market volatility. In reality, while gold has exhibited all of these qualities at various points, it has proved to be an unreliable friend. In 2020, for example, its price fell in the second half of the year despite the rising inflation. But, now it seems that the tables are turning over for gold.
Currently, inflation is triggering a mixed response in creating a demand for the yellow metal. Retail investors are snapping up gold coins to protect against inflation, but it isn’t enough to offset the selling in other market domains. We also witnessed gold hovering around $1800 levels, and it failed to break this strong resistance level.
The data numbers coming in from the U.S. weren’t quite impressive, which signalled that the Federal Reserve might now start tapering units in December. However, the effect it created on gold wasn’t significant. According to the bullion king of India, Prithviraj Kothari, there is portfolio diversification into other assets like crypto, and even though vaccination drivers are in full swing and economies are recovering, gold still finds a good hold in the market and has its loyalty intact. The reasons for this are –
- ECB – Analysts were looking ahead to the European Central Bank’s meeting on Thursday for clues about what might happen to the gold price, but the commentary had little effect on the yellow metal. The ECB left interest rates the same and announced that it is trimming its emergency bond purchases but insisted that it isn’t tapering. This had a positive effect on gold, and it didn’t succeed in breaking down the yellow metal.
- Delta Virus (Covid 19) – Perhaps the biggest concern for gold prices right now is the Delta variant of Covid-19. Gold prices rebounded as investors like Prithviraj Kothari, grew cautious over the COVID impact on the economy after NIAID director Fauci reiterated we are still in the middle of a pandemic. Americans are now getting infected with COVID-19 at 10X the rate needed to end the pandemic. The Fed’s Beige Book showed economic growth is getting rattled by the Delta variant, and that will continue to weigh on the economic outlook that will further strengthen gold.
- S. Data – With the CPI data not standing up to expectations, for some that push a possible (taper) announcement a little bit further down the road, and that should be fairly supportive for gold prices. Underlying U.S. consumer prices increased at their slowest pace in six months in August, lending credence to the Fed’s view that high inflation levels were transitory.
The data also raised expectations that the Fed may go slow on unwinding economic support measures and keep interest rates near zero for some time. The U.S. central bank is due to hold its two-day monetary policy meeting next week. Gold will tend to gain when interest rates are low, which reduces the opportunity cost of holding non-yielding bullion.
- Central Banks – An underlying economic activity incentivise central banks to keep the taps flowing, the key short-term driver of gold prices. The stimulus trade, which is very much active, is also good news for gold, says the bullion king of India. Precious metals will find support as central banks slow their stimulus reductions.
So what’s next?
The above key indicators clearly state that gold is here to stay. Time and again, it has proved its worth as a safe haven asset in times of uncertainty and also as a hedge against inflation. Central banks will also continue to support gold prices with their buying.
It seems clear that apart from the above-mentioned concerns that what is driving the precious metal right now is the dollar. It continues to remain important for gold prices even though its impact on the metal appears to have weakened. The fact that the Fed and the ECB are maintaining lower interest rates could provide support for gold alongside weak economic growth, according to Prithviraj Kothari. However, gold appears to be in a holding pattern for now and looks strong from here.