It’s been exactly a year since gold peaked at $2070 amid Covid concerns. And a year later, we are witnessing the gold prices crashing down. Initially, gold prices were capped by bullion banks capitalising on print taking after a sharp rise from March 2020. But currently, gold smashed lower in Asia Pacific trading, in a relatively quick drop from $1,750 to $1,677 as sellers continue the post-NFP momentum to this week.
Gold slipped to an over four-month low on Monday as solid U.S. jobs data fueled concerns of a sooner-than-expected interest rate hike, which could increase the opportunity cost of holding non-interest bearing bullion. By putting things together, we can get a clear idea behind this sharp fall in gold.
- S Jobs report – The first being, as mentioned, that the selling momentum picked up after Friday’s strong US jobs report. Gold had been consolidating since mid-July prior to the key risk event before finding fresh momentum to firmly breakaway below $1,800. Data from the U.S. Labour Department showed employers hired the most workers in nearly a year in July and continued to raise wages. That underscored remarks by Fed officials suggested a sooner than anticipated roll-back of pandemic era stimulus on the back of a solid labour market recovery.The US non-farm payrolls printed a strong 943000 non-farm job additions in the US during the month of July, stronger than the 870000 jobs as expected by the analysts and 850000 that was printed a month earlier. The latest data helped cement the thinking that the Federal Reserve (Fed) is moving towards the ‘substantial’ progress that it is looking for to start easing the bond purchases.
- Yields – As a result of a stronger than expected jobs report, the US 10-year yield jumped above the 1.30% mark after the data release and is now set to recover towards the 2% threshold to the end of the year. When we closely observe the commodities markets, we get to understand that any prospect of higher yields is a threat to gold. Gold is not doing well, as suggested by the bullion king of India, Prithviraj Kothari and Friday’s strong US jobs figures have come as a slap on gold’s face. Moving forward, higher US yields will continue increasing the opportunity cost of holding the non-interest bearing gold, which didn’t even fully benefit from the overshooting inflation and the ultra-low US yields recently, thus resulting in a further sell-off.
- Stock Markets – Asian stock markets kicked off the week on a positive note, although the US indices had nothing more exciting than mixed performance after the announcement of strong jobs data on Friday. The US jobs data gave a small boost to the Dow and the S&P 500 which closed Friday’s session 0.41% and 0.17% higher respectively. Even though the strong economic data and prospects of a tighter US policy are better for value stocks, the rising Covid cases should keep the tech stocks in demand, regardless of a tighter Fed policy. However, the tech giants can expect a boost in prices, predicted by the bullion king of India, Prithviraj Kothari.
- Vaccination – One of the reasons why gold crashed from its peak was the worldwide vaccination drive. There is a general belief that the vaccination and the introduction of the vaccination certificate will prevent businesses from going through strict lockdown measures again. The ‘certificate’ setup will allow them to stay open instead and continue functioning with those who can present a valid vaccination certificate. The idea is obviously to get as many people vaccinated and get out of the crisis as soon as possible. In spite of a third wave threat, economies across are opening up and gradually moving towards safety. According to the bullion king, Prithviraj Kothari, this could also possibly be a reason for the drop in gold prices.
- Inflation – The latest update on the US consumer price inflation is due on Wednesday, and the expectation is a certain steadying in the US consumer prices near last month’s 5.4% print. China released softer-than-expected consumer prices this Monday, while producer prices advanced to 9%, as an indication that the pressure on factory-gate prices remains strong.
Gold could fall towards $1,700 in the near term, however, we are still going to see a tremendous amount of support getting pumped into the global economy, and that should still support gold.