Gold has climbed to its highest level in two months despite the ongoing uncertainty regarding oil prices, inflation, and US Federal Reserve interest rates. Gold prices have rebounded to levels last seen in the first week of June.
After trading under $4,000 for a few days, gold prices have increased from a recent low of $3,966 to $4,400 as of August 10. On Tuesday, gold is again under pressure ahead of the US CPI data to be released tomorrow. Gold price in India jumped Rs 170 to trade at Rs 1,52,230 per 10 grams on Tuesday.
“The main risk is a renewed inflation shock that pushes rate expectations higher again and sends the dollar and real yields up. Short of that, I think this move has further to run,” says Shawn Young, Chief Analyst, MEXC Research.
US Fed Rate Hike Expectations Fall
It was widely expected that the US Fed would raise interest rates at the FOMC meeting in September. The July job market figures failed to meet expectations. As a result, the probability of a September rate hike has fallen, with markets now predicting an increase in rate in October or December. A rate hike is unfavourable for non-yielding assets like gold.
New labor data indicated the US economy lost 23,000 jobs in July, contrary to economists’ predictions of growth. Additionally, revised figures for May and June reveal 103,000 fewer jobs were created than previously reported. Even though the unemployment rate decreased from 4.2% to 4.1%, this drop can be attributed to a decline in the number of people seeking jobs.
The reversal in rate hike expectations worked in favour of gold. Gold prices increased due to a weakening dollar, which positively affected non-yielding assets like gold.
Oil Prices Add To The Mix
The situation in the Strait of Hormuz remains fluid. Oil traded lower over the last few days. That happened when there were fewer US strikes against Iran, suggesting a potential deal. But fresh demands from Trump have clouded prospects for a near-term agreement, keeping markets wary of prolonged supply disruptions. Oil trades above $88 per barrel on Tuesday, rising for the fourth straight session amid heightened uncertainty in the Middle East.
Central Banks Continue To Buy
The big support for gold has always come from the demand shown by the Central banks. In June, central banks purchased 51 tonnes of gold, as reported by the World Gold Council. The People’s Bank of China added 15 tonnes to its gold reserves, marking its 20th consecutive month of buying. This is the highest monthly addition since October 2023. Even the gold-backed exchange traded funds in China are experiencing the longest period of inflows in months.
What Happens Next?
How gold performs from here will largely depend on the US CPI data for July, which will be released on August 12. The US inflation reading for July will give fresh clues to the market on the Federal Reserve’s policy outlook.
“Wednesday’s US consumer price report and Thursday’s producer price data will likely steer rate expectations, coming after last week’s soft July jobs numbers pushed markets to pare back bets on a Fed rate raise next month. Should the incoming data keep pointing to a slowing economy without inflation picking back up, markets may trim expectations for tighter policy even further,” says Dr. Renisha Chainani, Chief Research Officer, Augmont.
If July inflation remains sticky or rises, expect gold prices to trend lower. If not, there is a possibility for the precious metal to rise further.
“A hotter-than-expected reading could revive rate-hike bets and pressure gold, whereas softer inflation may reinforce the bullish momentum. Gold has already gained around 9% this month, and a break above the $4,390 100-day SMA could open the door to further gains, with the 200-day SMA next in focus,” says Lukman Otunuga, Head of Market Research at global trading broker FXTM.
Disclaimer: This article is for informational purposes only and should not be construed as investment advice. Gold prices are subject to market risks, and past performance is not indicative of future results. Readers are advised to consult a certified financial advisor before making any investment decisions. Financial Express Digital does not take responsibility for any financial losses arising from decisions made based on this article.