By Dr. Renisha Chainani, Head- Research, Augmont – Gold for all
Gold outperformed all major traded commodities in the first quarter of 2023 supported by a stable dollar and continued demand from central banks. But prices have been trading weak to rangebound in the second and third quarters. After touching a record high of $2085/oz (Rs 61845/ 10 gm) in the first week of May, prices have been in continuous downfall by closing third quarter of 2023 at $1865/oz (Rs 57100/10 gm) due to dollar strength and rising US treasury bond yields.
The main factor weighing on Gold is presumably the expectation of interest rates remaining higher for longer after the Fed made fairly hawkish remarks. This is also evident in the marked appreciation of the Dollar Index and US Treasury Bond yields.
Now everyone wants to know, whether there will be further weakness in prices in the fourth quarter of 2023 and further in 2024. I think we are very near to prices bottoming out, I continue to see upside potential for Gold in the medium-term to long-term amid the following supporting factors:
• Peak Interest Rates
The Fed’s latest rate-hiking cycle began in March 2022, right after Russia’s invasion of Ukraine threatened global stability and sent gold prices skyrocketing. To combat inflation, the US FED has raised interest rates 11 times since then, from 0% to 5.25%. When the FED meets in November, it is projected to hike interest rates one more time. Recent signals of a slowdown in inflation and labour market statistics suggest that the Fed has reached its peak policy rate. Gold prices could firm up and rebound if the Fed signals that it has finished rising rates and will take a break before cutting rates next year.
It is often assumed that rising interest rates have a negative relationship with gold prices. The theory is that when interest rates rise, money would flow out of gold and into high- yielding investments because rising interest rates make fixed-income investments like bonds more appealing. With interest rates not expected to rise further, a pause is considered beneficial for gold.
The US dollar has long been the world’s reserve currency, controlling the global economy, but recent events have brought this arrangement into question.
The US dollar’s dominance is being challenged on multiple fronts, ranging from nations preferring to conduct trade in local currencies to BRICS developing its own currency, Saudi Arabia’s willingness to sell oil to China in yuan, and China and Russia increasing their efforts to abandon the US dollar.
The BRICS (Brazil, Russia, India, China, and South Africa) are attempting to create their own shared currency. The new currency may be backed by a number of commodities, including gold and other rare-earth elements. If there is a shift in public perception of what is going on with the dollar and the US economy, sentiment will move quickly, and gold is usually the first asset to react to that. Global central banks are rushing to buy gold, which reached a record high in 2022. This demand is projected to remain high shortly.
• Central Bank Gold Buying
Central banks purchased 387 tonnes of gold in the first six months of 2023, the largest buy in the first half of a year since 2000. The allure of Aurum was also evident in CY22, when Central Banks purchased a total of 1,136 tonnes of gold. Emerging market central banks such as Russia, China, Turkey, and India continue to buy gold with both hands whenever prices fall.
Because gold has no credit or counterparty risks, it serves as a source of trust in a country and in all economic circumstances, making it, along with government bonds, one of the most important reserve assets in the world. One of the key functions of gold for central banks is to diversify their reserves.
• Slower Growth in the US
Consumer spending in the United States is dwindling as a result of persistently high inflation and substantial interest rate hikes. Savings rates have reversed the upward trend that began in late 2022 and continued into Q2 2023, falling to 3.5% in July, indicating that consumers will continue to spend from savings. According to new data, mortgage applications for home purchases in the United States fell to a nearly three- decade low last week, showing that residential real estate is hurting from the recent rise in borrowing costs. This will almost probably have an impact on the US growth rate. With higher rates, GDP growth in the United States is predicted to slow to 0.8% in 2024.
Looking ahead, as the US falls into a brief recession in H1-2024 and the US Fed closes its rising cycle with likely interest rate decreases in 2024, investor flows into gold and hence prices will grow once more.
• India’s Festive and Marriage Season Demand
The months of September through February are usually auspicious, with festival and wedding seasons driving up gold demand. Although Indian weddings take place all year, most of them historically take place between November and February. Physical gold and silver demand typically spikes around this time, especially because gold
jewellery is an essential aspect of every Indian wedding. This is due to the aesthetic and symbolic value of gold in weddings.
Wedding season in India typically coincides with Diwali, or Deepawali, a big celebration celebrated throughout the country that spurs some gold-buying sprees. In India, the holiday season begins in September, with festivals such as Raksha Bandhan,
Ganesh Chaturthi, Navratri, Dusshera, Diwali, and others considered good times to purchase gold. During these festive seasons, there is a high demand for yellow metal, which is mostly driven by rituals and traditions. Indians visit jewellery stores,which may contribute to an increase in physical demand for gold between September and February.
• Safe–haven demand
Gold is frequently regarded as a safe-haven asset during times of geopolitical unrest, economic uncertainty, or financial market volatility. There are still huge economic dangers that investors aren’t factoring in.
While the US economy is resilient, and India’s macroeconomic outlook is positive, there are evident signs of stress in Europe and China, which could have an impact on the other major economies. If economic development in the United States and India slows, gold will benefit.
Gold may remain volatile in the immediate term, reacting to inflation, economic indicators,
and interest rate trajectory discussions. However, I am bullish on gold for the next 6-12
months. I don’t think, prices will sustain below $1860 (Rs 57000/ 10 gm) and it will rebound
soon and head higher towards Rs 60000/10 gm in the next 2-3 months and probably a new
high in the first half of the year 2024.
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