Triggers expected to drive a rally in gold prices

Gold lately has seen quite a lot of volatility. Last week we saw gold being the best performing precious metal, while this week it opened on a negative note. The dip in Treasury yields last week helped boost the appeal of the non-interest-bearing metal. Gold then stabilized later in the week as the dollar and Treasury yields pared some of their gains made in the wake of U.S. inflation data that came in significantly higher than expected. Prices paid by U.S. consumers surged in June by the most since 2008, topping all forecasts and testing the Federal Reserve’s commitment to sticking with ultra-easy monetary support for the economy.

Last week, the yellow metal found some life after Powell’s testimony pushed back on recent hawkish pricing, while central banks and physical buyers also helped prop up markets. But, even as macro growth angst catalysed a re-pricing in expectations for Fed hikes, gold still could not catch a bid confirmed the bullion king of India.

Gold fell below the psychological $1,800 an ounce level as-

  • The U.S. new home sales missed expectations in June with a fall of 6.6%. The prior month’s number was also revised down.
  • New home sales were at a seasonally adjusted annualized rate of 676,000 homes in June, the U.S. Commerce Department said on Monday.
  • May’s sales were revised down to a rate of 724,000 units from 769,000.
  • The market consensus called for sales to advance to 800,000 units in June.
  • On an annual basis, new home sales were down 19.4% from last year’s estimate of 839,000 units.

Gold saw a decline in the prices due to the data release. It had a trickle effect on the yellow metal spiralling it into a negative territory. The gold industry is concerned about the stagnant gold prices gold and waiting for new opportunities for the metal to bounce back.

When evaluating the gold market one of the primary drivers of gold’s perception as a store of value is interest rates. There are two ways to look at interest rates. The nominal interest rates, which is the headline interest rates such as the 10 year Treasury Yields, and real interest rates Treasury yields adjusted for inflation. As inflation rises and Treasury Yields remain the same or move lower, real interest rates decline. This reduces the cost of holding a non interest bearing investment such as gold. Currently, real interest rates in US are negative. Therefore, the opportunity cost of holding gold is minimal, or to some, actually demonstrating a better return profile than cash or Treasuries.

Historically, gold prices typically rise as real or inflation-adjusted Yields fall deeper and faster into negative territory. Gold price have struggled in 2021. Interest rate experiences have reset higher in February. However recently interest rates have declined to the lowest level in five months. And monthly CPI data has increased. Therefore, real interest rates have moved significantly lower. Using the core CPI data analysed at 4.5% and the 10 year yield of 125 basis points, real interest rates is now running at -3.25%. In theory this should serve as a tailwind for gold prices

While a slower global growth profile, matched with transitory inflation, should keep Fed tightening at bay and eventually provide a beneficial environment for gold, risks remain in the near term. Given that gold’s recent underperformance against slumping real rates continues to suggest a lack of investor interest, and consolidation of current market pricing that may result in higher real and nominal rates could still send prices lower.

Investors might have to wait until September to see how the next recovery phase unfolds. A new wave of the COVID-19 virus is sweeping through the U.S- , if the virus continues to spiral out of control, putting the recovery at risk, and then he would expect to see renewed interest in gold.

Prithviraj Kothari of RSBL said that the triggers working in favour of gold price rally in the long-term are rising concern of global inflation that seems to be persisting further and increasing number of Covid-19 cases, which includes the delta variant cases in the US, some European nations and South-East Asian countries. Outlook for gold is still bullish and any dip in gold price should be seen as an opportunity by yellow metal.

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