By Jigar Trivedi
Comex gold traded near two-year lows at around $1,670 an ounce, remaining under pressure from a strong dollar and surging Treasury yields that reflected expectations for tighter monetary policy and slowing global growth. The US Federal Reserve led a raft of central bank rate hikes this week, delivering its third straight 75 basis point rate increase to bring down inflation. The European Central Bank is also expected to raise rates further, with ECB board member Isabel Schnabel saying that elevated inflationary pressures in the eurozone are likely to be more persistent than anticipated. Higher interest rates raise the opportunity cost of holding non-yielding bullion, denting its appeal.
Gold also lost its shine as a store of value in times of economic uncertainties as the US’ relative economic strength and the Fed’s aggressive stance against inflation lifted the dollar at the expense of other safe-haven assets.
Dollar hovers near 20-year high on Fed boost
The dollar index held above 111, hovering near a 20-year high of 111.81 hit on Thursday, underpinned by expectations that the Fed will remain aggressive in fighting inflation even at the risk of a recession. The Fed raised interest rates by 75 basis points for a third time in a row on Wednesday and projected rates to peak at 4.6% next year with no cuts until 2024, defying market speculations that the central bank could ease policy in 2023 to better manage the economy.
The dollar also benefited from safe-haven flows amid escalating geopolitical tensions surrounding Ukraine and growing fears about a global economic slowdown. The greenback scaled multi-decade highs against the euro and the sterling while hovering over two-year highs against the Australian and New Zealand dollars. Meanwhile, the dollar weakened against the yen after Japanese authorities intervened in the currency markets for the first time since 1998.
Indian rupee hits all-time low
USDINR weakened to an all-time low of 81.23, amid a continued rally in the US dollar after the Fed raised interest rates by another three-quarter of a percentage point and signalled it will keep rising well above the current level. Domestically, foreign portfolio outflows have also pushed the rupee lower while inflation has stayed above the upper end of the central bank’s 6% target this year. The RBI already raised borrowing costs by 140bps so far this year and has been selling dollars to prevent the rupee to fall further. Still, such intervention is weighing on the country’s foreign reserves and widening the current account deficit.
India gears up for the festival season
Indians will be celebrating Dussehra, Diwali and Dhanteras in October when buying gold is considered auspicious. India’s love for gold is well-known. The precious metal has a central role in the country’s culture, a fundamental part of many rituals, considered to be a store of value, passed on from generations, and symbolic of Goddess Lakshmi, a mark of wealth. Usually, the second half of the calendar year reports an increase in gold demand with the onset of the festive season. In March 2022, MCX Gold hit a high near Rs. 55,4500 per 10 gram and from there it declined to the current point of approx Rs. 50,000 per 10 gram. With such a drop in prices, we may see increased food fall in the jewellers’ shops. Although the central bankers around the world are in the race to beat inflation, the dollar is up and safe haven demand has gone down, the return of Indian retail demand may push gold in the near term. MCX Gold October futures may rise to Rs. 51,300 per 10 gram in sessions to come.
(Jigar Trivedi, Senior Analyst – Currency & Commodity, Reliance Securities. Views expressed are the author’s own.)