What a year it’s been the world over. Financial markets have swung from all-out bullishness to maximum bearishness. Most asset classes- equities. Bonds, crypto-coins, and commodities (ruling out energy) have fallen by a fifth or more from their highs. In such a situation gold should have been shining and how. But the dollar, monetary policies, inflation and rate hikes have dampened the bullish sentiments for the yellow metal.
According to the Bullion King Of India, “Bullion prices plummeted this year, recently hitting an over two-year low as rising yields drove up the opportunity cost of holding gold. The metal has largely lost its safe-haven status this year, and also appears to have failed as an inflation hedge.”
With US inflation staying stubbornly high this year, rising interest rates are expected to pressure bullion prices in the near term.
Gold has tumbled from above $2,000 an ounce in March to around $1,650 as the U.S. Federal Reserve and other central banks raised interest rates rapidly to tackle inflation.
Higher rates pressured gold by lifting returns on other assets such as government bonds and the dollar that compete with gold for investment
And this was very well witnessed in the current week.
The precious metal quickly tumbled during Powell’s press conference, which followed Fed’s decision to raise rates by 75 basis points for the fourth time in a row. The latest hike means that the Fed has already raised rates by 375 bps since March, bringing the key policy rate to a range between 3.75%-4%.
“Gold prices fluctuated in a narrow range on Thursday, following a volatile session after US Federal Reserve Chair Jerome Powell tamped down on expectations of a policy pivot saying it was “premature to discuss pausing”. Shared the Bullion King.
According to Prithviraj Kothari. Managing Director at RiddhiSiddhi Bullions Limited, “Gold lost all gains, post-Fed statement, as Chair Jerome Powell signalled that the “ultimate level” of interest rates would likely be higher than previously thought. He also said the window for a soft landing has “narrowed.”
Spot gold rose as much as 1.3% after the release of the policy statement at the end of the two-day meet. However, the price rise dampened post-Powell’s remarks.
Powell said that even though a slowdown in rate hikes might happen in December or February, the U.S. central bank is likely to take rates higher than previously thought. “At some point … it will become appropriate to slow the pace of increases as we approach the level of interest rates that will be sufficiently restrictive to bring inflation down to our 2% goal,” he said. “We still have some ways to go. And incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.”
Powell also acknowledged that the window for a soft landing has “narrowed” as monetary policy has become more restrictive this year. “The inflation picture has become more and more challenging over the course of this year,” he said. “That means that we have to have policy be more restrictive, and that narrows the path to a soft landing.”
Although gold is considered a hedge against inflation, higher US interest rates increase the opportunity cost of holding the non-yielding asset and this further boosts the dollar.
During the press conference, Powell hinted that rate increases could be less aggressive from now on. According to him, the critical question becomes not how fast but how high to raise the policy rate and how long to keep it elevated.
Another hawkish point was that it was still premature to think about a pause in rate hikes, with the December meeting expected to reveal how high the Fed might raise rates thus strengthening the dollar and pushing gold down further.
But one positive outcome of all these events will be the old trading mantra- BUY ON DIPS.
Well then it’s obvious that any dip in prices of the yellow metal will result in a surge in its demand and people are more likely to buy it given the uncertain times that lie ahead. Hence gold won’t be under a strong impact thus a heavy decline in its prices is not expected.