Gold’s bread and butter has been the ultra-accommodative monetary stance of the Fed and that is starting to normalise
Gold prices moved lower in September as the dollar strengthened on the back of a hawkish Fed. Rising US Treasury bond yields put further downward pressure on gold. International gold prices settled 3% lower, slightly above $1,750 per ounce. With the rupee depreciating in the month, gold prices (in rupees) ended 1.5% lower.
After months of mixed messaging, amid a Delta variant led Covid-19 resurgence, Chair Powell sounded hawkish in the Federal Reserve’s latest policy statement in September. Looking past the stall in hiring in August, Powell was optimistic about the GDP growth and progress in the labour market.
While strong monetary and fiscal stimulus measures have helped support consumer demand, supply-side constraints are now adversely impacting economic activity. Much of Europe is grappling with a rise in electricity and natural gas prices triggered by an increase in demand as economies opened up and lower inventories. That has hurt consumer sentiment. A power supply shortage in China is resulting in an industrial contraction and depressing the economic outlook. Amidst waning monetary support, the global economy is staring at stagflation if rising energy prices augment inflation and slow down the economic recovery
While the unwinding of monetary stimulus may not trigger a taper tantrum this time, this is a tricky time to be changing policy. Proceed too fast and growth may be set back or policymakers have to take a U-turn. Go too slow and risk higher inflation. In the former case of central banks retreating to easier policy, gold will return to strengthening. In the latter, inflationary pressures will keep gold relevant.
In relation, the rubber stamp exercise of raising the US debt ceiling has the potential to spark political and economic uncertainty this time given the high levels of public debt. If the ceiling is not increased in time, the US government could have problems making interest payments and would have to default on its bonds. Concerns about the sustainability of Uncle Sam’s ballooning indebtedness could disrupt markets and be negative for the dollar and positive for gold.
Gold’s bread and butter has been the ultra-accommodative monetary stance of the Fed and that is starting to normalize, which will cap its upside. But over the next couple of quarters, its utility as a portfolio risk diversifier and an asset that tends to keep up with inflation could come to the fore, limiting the downside. Gold will thus remain range-bound over the near to medium term unless we see some macroeconomic risks materialize nudging the Fed to rethink policy normalisation.
The writer is senior fund manager, Alternative Investments, Quantum Mutual Fund