Your Money: Gold may flourish if a debt or currency crisis unfolds

While gold price will be determined by how inflation and Fed policy shape up, it is prudent to hold it in these times of uncertainty

Then in a dramatic reversal, the metal temporarily retreated below the $1800 level as the dollar strengthened only to end the month at $1774.5 an ounce, a decline of 0.5% for the month.
Then in a dramatic reversal, the metal temporarily retreated below the $1800 level as the dollar strengthened only to end the month at $1774.5 an ounce, a decline of 0.5% for the month.

Growing unease that inflation will slow the economy and sabotage the stock market rally led gold to five-month highs in November flirting with the $1900 mark levels. Then in a dramatic reversal, the metal temporarily retreated below the $1800 level as the dollar strengthened only to end the month at $1774.5 an ounce, a decline of 0.5% for the month.

The rupee depreciated by 0.4%, supporting domestic prices. The emergence of the Omicron variant has started impacting the economy to what earlier was assumed to be a post-Covid world and is seen clearly putting support for gold while other asset markets see some money taken off the table to assess the real impact.

Gold and US Fed
In October, the Fed said the US economy was doing well enough to begin tapering its monthly asset purchases starting November. They anticipate the tapering process to be completed by mid-2022. The central bank also assured markets that it will raise interest rates only after it is done tapering its asset purchases. Since the Fed released that monetary policy statement, the US consumer inflation print came in at 6.2%—the highest in three decades.

This was bullish for gold prices, as it was clear that the central bank would remain behind the inflation curve, keeping real rates lower for longer. But hawkish comments from some Federal reserve members about increasing the pace of tapering caving into inflation pressures which they earlier shrugged off as transitory, led to some bids coming off gold.

Higher inflation
While gold is a preferred instrument to hold during times of higher inflation, speculation that the Federal Reserve will be forced into a faster-than-expected rate hike has led to a tug of war between gold on one side and Treasury yields and the dollar on the other.

However, it may not be so easy to balance out the headwinds to growth from tighter liquidity and higher interest rates. In addition, gold has also been weighed down by some investors preferring Bitcoin as their inflation hedge which is far from an established trait.

The Turkish lira depreciated sharply in the month. This is giving rise to fears of the spread of a currency crisis to other countries with dollar-denominated debt. Gold, which is a monetary asset, may flourish if a currency or debt crisis unfolds. While the price action in gold will majorly be determined by how inflation and Fed policy shape up, it is prudent to hold the strategic asset class in these times of uncertainty plagued economic and health dispersion.

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

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