Traditionally, gold has been referred to as the best bet against inflation. However, even though US inflation has crossed a four-decade high, the gold price refuses to budge and move higher. Gold price in dollars is almost flat over the last 1-year and showing a negative return over 3-years if prices are adjusted for inflation.
Here’s why the gold price is not moving up in spite of rising inflation. To bring inflation down, US Fed is busy hiking rates and in a rising interest rate scenario, gold is not a preferred investment. Investors will find it very appealing to stay in the currency due to the rising rates because they can receive a bigger currency yield. The US dollar has strengthened as a result of this. Given that gold is quoted in US dollars, its price is certain to decrease.
On September 13, when the US CPI data was announced showing persistent inflation that could lead Fed to hike the rate aggressively, the gold price dipped below $1700 for a while.
It will be interesting to see how gold prices respond when interest rates eventually stabilize and inflation is brought under control. A sudden increase in gold prices may not be anticipated till then. And, when rates and inflation starts to stabilize, the impact on the equity market may also push prices of other asset classes higher.
As per a report by Emkay Wealth Management titled ‘Navigator’, the prices of yellow metal could be under pressure in the near term. Gold prices are currently trading in the range of $1720-1740, and are expected to break the $1700 in the short term. This is a crucial support level for the yellow metal. The probability of gold testing the level of $1680-1630 level is high indicating further pressure on the precious metal.
The last time the price of Gold was at this level there was a sharp bounce back which took it beyond the US$ 1860 level. A close look at the 5 -year gold chart shows the high as US$ 2070 and the low as US$ 1176.
The current level, which is US$ 1720-US$1740 is a crucial level as it could break either way. But the probability of gold breaking the support levels is higher because the resistance levels have been tested a couple of times in the last two months without any success as such. Therefore, a test of US$ 1680 and US$1630 on the downside cannot be ruled out, though it may not be able to advance much lower because a move downwards takes it closer to the cost of production.
Gold is an international commodity, and it is priced in US dollars. So, the price movement of the yellow metal is closely linked to the greenback. A strong dollar makes gold cheaper and vice versa (expensive), which leads to a reduction in prices. Currently, the Dollar Index is swiftly moving up and therefore the strength of the US Dollar is getting priced in especially in commodity prices, and this may compel gold to test lower levels.
More than this, the very hawkish stance of the US Fed is adding fuel to fire, as the Fed has already reaffirmed its commitment to achieving its inflation target of 2%, and not to rest until the goal is reached. The end result is that rather than inflation and uncertainties which could have given Gold an edge, the inflation-fighting has assumed greater importance.