International gold prices in January were stuck between red-hot price pressures and a hawkish Fed, ending the month 1.5% lower, at $1790 levels. In response to the Fed’s hawkish pivot, the yield on the 10-year US Treasury moved up significantly from 1.5% in December 2021 to two-year highs of about 1.9% in January before settling close to 1.8%.

The jump in yields suggests that investors are concerned about an aggressive Fed hurting the US recovery. This is sapping investor appetite for riskier assets. This should spur interest in portfolio diversifiers like gold, especially since the Fed is expected to have a higher tolerance for the stock market going down as inflation gets out of hand.

Weak crypto aids gold
The leading cryptocurrency Bitcoin too is down by 50% from its all-time high of November 2021 as risk assets weaken. This kind of volatility isn’t new to this asset class, making investors once again question its role as a portfolio diversifier and its positioning as a replacement to gold.

Oil prices are on the boil touching $90 a barrel for the first time in seven years spurred by heightened geopolitical tensions in Eastern Europe and the Middle East. If oil prices sustain at current levels, it could fuel inflationary fire across global commodities and products. It will also inflate India’s import bill, putting further pressure on the rupee, which is positive for domestic gold prices.

Demand for gold
Even as the Fed is sounding more hawkish everyday and Covid-19 is most likely behind us, demand for the yellow metal is getting support from higher inflation, market volatility, US-Russia tensions over Ukraine and the drop in Bitcoin. SPDR Gold Shares, the largest gold-backed ETF, recorded its biggest daily net inflow worth $1.63 billion in January since listing in 2004, indicating investor interest in gold.

While domestic pent-up demand for gold got released in 2021, demand is expected to go back to pre-pandemic levels in 2022 aided by higher savings, increased mobility and stable price levels. It is clear now that central banks face difficult choices in the post-pandemic environment and how they navigate this will determine gold’s trajectory this year. While the current era of US monetary policy will be challenging for the metal, inflation and other risks will keep gold relevant.

The writer is senior fund manager, Alternative Investments, Quantum Mutual Fund