MCX gold glitters in turmoil, will the rally continue?

In India, gold prices rallied by more than 6% in 2023, out of which it gained more than 5% last week.

Annual gold demand in 2022 increased by 18 percent yearly, according to the World Gold Council.

By Deveya Gaglani

Gold prices were under selling pressure last year after hitting an all-time of $2070 in 2022. Prices steadily declined after March 2022 as Fed started hiking interest rates and monetary tightening by central banks around the world, reducing gold’s appeal as an inflation hedge while raising the opportunity cost of holding the non-yielding asset. Gold prices were dominated by the interest rate in 2022. The strong dollar index also impacted bullion prices which gained more than eight percent in 2022. It settled around $103.88 after hitting a high of $114.77. 

Gold prices regain momentum in 2023

The yellow metal surprised everyone after being written off as an inflation hedge by major investment banks by gaining almost 10 percent in 2023. The smart money and global central bank were accumulating Gold in 2022 as it was available at a discount, thanks to monetary tightening.

According to the World Gold Council, annual gold demand in 2022 increased by 18 percent yearly, hitting 4,741 tonnes globally – the highest total since 2011. Central bank’s demand doubled to 1,136 tonnes in 2022, up from 450 tonnes the year before and to a 55-year high. In 2023, the economic scenario favored Gold bulls as gloomy economic scenario across the globe and the contemporary bank crisis flocked investors towards a true safe haven (Bullion). Also, the reopening of China’s economy, one of the biggest buyers of gold, improved the outlook for the precious metal’s demand in 2023. The country’s central bank, the People’s Bank of China (PBoC), has already increased its gold purchases by 32 tonnes, the first increase in its gold reserves since September 2019.

Weakening of the Dollar index

The dollar index gained some ground in Feb this year after it rallied more than two percent from 100.8 to 105.4 after the Fed chairman indicated that they will continue to hike rates in 2023, which lifted the dollar index higher. However, the Silicon Valley bank collapse turned the fortune for Gold bulls as now there is a high probability that the central bank would soften its stance to avoid an economic crisis that supported Gold prices. The dollar index pared its gains, and it is down by more than one percent in March’23 and is trading near $103.8.

Gold prices poised to touch 62,000 levels

In the domestic market, Gold prices rallied by more than six percent in 2023, out of which it gained more than five percent last week. Prices made a new lifetime high of 59,400 levels. The Silicon Valley bank collapsed, and the high-profile Credit Suisse bank, which is under stress, acted as a catalyst for gold bulls. Now, investors will be awaiting Fed’s policy announcements, and the dot plot will be a key risk event. The US Federal Reserve’s (Fed) policy decision, alongside the revised Summary of Projections (SEP), will drive the Gold prices this week as investors will try to figure out how the Fed’s policy will be shaped amid worrying signs of tightening in financial conditions.

The market was pricing 50 basis points two weeks earlier after FOMC Chairman Jerome Powell told Congress that they were prepared to increase the pace of rate hikes if data warranted it. Last week, market dynamics changed everything after the SVB bank fiasco, and now there is a chance that the Fed might not hike the rates. On the other hand, policymakers are unlikely to forecast the terminal rate. Nevertheless, a terminal rate forecast at or above 5.5% should be seen as a hawkish outlook, while a reading below 5.5% should suggest that the Fed is getting closer to a pause in the tightening cycle. Fed outlook will dominate the Gold prices this week. A dovish outlook will help Gold prices inch higher, and they might touch the 62,000 level in a few months.

(Deveya Gaglani, Research Analyst – Commodities, Axis Securities. Views expressed are author’s own. Please consult your financial advisor before investing.)

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First published on: 20-03-2023 at 10:42 IST