Gold recovers from flash crash as tapering fears ease

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Gold reversed a last week’s loss as the drop in Consumer Confidence highlighted larger concerns about the economy being endangered by rising prices and virus outbreaks. The metal also gained since the report mitigated fears that the Federal Reserve might soon reduce stimulus, which had been a key factor in the metal’s rise to a new high last year.

Gold prices were oversold and the drop was a little overdone. We were starting to see the reality that economic stimulus in the United States and around the world will continue. A plunging dollar and a drop in consumer confidence in the United States boosted demand for gold, which was on track for its third straight rise.

Consumer confidence in the United States sank to its lowest level in over a decade in early August, as Americans were increasingly concerned about the economy’s prospects, inflation, and the recent spike in coronavirus cases.

The dollar and 10-year treasury yield in the United States both fell as a result of the survey, adding to the appeal of gold, which is not yield-bearing and becomes cheaper for holders of foreign currencies when the currency falls. Increased physical demand, particularly from top users in India and China, bolstered bullion’s standing.
Uncertainty about the quality of the global economic recovery, along with the spread of the delta version of COVID-19 and speculation of the Federal Reserve unwinding its pandemic-era monetary accommodations later this year or early next year, has pushed gold off in recent weeks. The majority of gold’s recent rise is due to rising inflation fears, as the FED maintains its ultra-accommodative monetary policy in the conviction that present high inflation is transitory.
Interest rates will likely remain a key driver for gold in the short and medium term. The outlook for the remainder of 2021 remains mixed. There is still a threat of a third wave of COVID-19 and consequent further lockdowns.

As last two months employment report has been positive, there is expectation or speculation in the market that FOMC to officially announce taper details, with actual tapering beginning at the Dec FOMC/end of the year. Therefore, markets will now trade the remainder of 2H’21 cautiously with Gold being defensive.

Investment demand in India through ETF, Central Bank and Sovereign Gold bond has been very strong. ETF holdings have reached to 35 tonnes in compared to 23 tonnes a year ago. SGB have an outstanding 75 tonnes of gold subscribed in last 6-7 years, and out of that, in 2021, there has been 20 tonnes of subscription seen. RBI has also been gradually adding gold reserves in its holdings and India now holds around 700 tonnes of Gold in its reserves.

Meanwhile, Jewellery demand is gradually picking up. Demand in H1 totalled 158 tonnes, 39% lower than the H1 average from 2015-2019. This suggests Indian are more inclined to investing in gold through ETF, SGB, Digi gold rather than just buying jewellery.

International and Indian Gold Daily Price Chart

There is a triple bottom at $1675/80 (Rs 45500), and a break of that opens up $1550 (Rs 42000). On the topside, a retaking of $1830(48500) would help install confidence towards $1920(Rs 50000) and $1960 (Rs 52000).

Read more: How Much More Downside Is Left In Gold Price?

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