Last week was terrible for gold as it witnessed a 6.04% dip. This decline followed the comments released by the Fed. Fed’s hawkish stance spurred a new wave of concerns about tapering. However, prices stabilized at around $1,770 on Monday as the US Dollar dropped slightly from its two-month high. Some investors may take this opportunity to buy the dips, but uncertainties surrounding the Fed’s next interest rate move may continue to weigh on the prices.
The spot price of gold reached $1,787.80 (£1,286) per ounce early on Tuesday morning, up 0.3% from where it rested at the close of play on Monday. Gold steadied after posting the biggest weekly loss in 15 months as the Federal Reserve’s hawkish shift damped reflation bets. Gold is attempting a bounce from two-month lows amid falling yields, although a broadly firmer US dollar is likely to limit the rebound.
Gold bears once again became active in the market but couldn’t sustain for long. Following were the key drivers for the yellow metal –
- Inflation – Fed President Bullard said he sees inflation running at 3% this year and 2.5% in 2022, which would meet our new framework where we said we are going to allow inflation to run above the target for some time. From there, we could bring inflation down to 2% over the subsequent horizon. Prithviraj Kothari, the bullion king of India feels that this suggests that conditions may be maturing by the end of 2022 for the Fed to consider tightening, which is much earlier than the market had anticipated.
- Rate Hike – Inflation risks may warrant the US central bank beginning to raise interest rates next year, St. Louis Fed President James Bullard said Friday. His comments came after last week’s Fed meeting where officials signalled monetary policy tightening could start earlier than expected. Chair Jerome Powell further added that the Fed would initiate a discussion about scaling back bond purchases used to support financial markets and the economy during the pandemic. The June FOMC meeting forecasts signalled that two rate hikes are likely by the end of 2023 as economic recovery father’s strength and inflationary pressures intensify. The decision hinted that the Fed would raise interest rates and begin asset tapering earlier than expected.
- Treasury Yield – The benchmark of a 10-year US Treasury Yield fell to its lowest level since Mar 3, 2021. A flattening US Treasury yield curve also seemingly reflects markets attempting to price in the possibility of a 2022 rate hike.
- Dollar – Ultra-low interest rate environment and central banks quantitative easing since the Covid-19 pandemic has been riding gold and a tailwind. Hence, it may be more vulnerable to a pullback when the reverse begins. Although the retreat in the dollar alleviated the sell-off in gold, the near-term momentum may still be tilted to the downside as tapering fears weigh.
It’s clear that the economy is improving rapidly, and the medium-term outlook is very good. But the data and conditions have not progressed enough for the Federal Open Market Committee to shift its monetary policy stance of strong support for the economic recovery. And hence people like Prithviraj Kothari from RSBL are using the correction to buy gold, at these price levels; there is value to hold positions in gold, especially for the long run.