Bleak outlook for gold
GOLD prices dipped on Tuesday as investors braced for a regime of high interest rates in the United States and elsewhere as central banks around the world seek to rein in inflation which has dogged the global economy since last year. At the European Central Bank's policy meeting this month, there is a possibility of an interest rate hike, even in the face of the energy crisis confronting the trading bloc.
Last Friday, US Federal Reserve Chair Jerome Powell announced that the central bank had the mandate to curb inflation and gave a strong indication that it would accomplish the mission.
Along with the development, the Federal Reserve anticipated that gold could be at risk of falling to $1 600 an ounce unless buyers stepped in to buy the dip.
On Monday, the U.S dollar surged to a 20-year high against a basket of currencies after Powell indicated interest rates would be kept higher for longer to bring down soaring inflation.
The dollar hit 138,88 against the Japanese yen, the highest since July 21, while the offshore yuan fell to a fresh two-year low of 6,9321 per dollar. Markets are now pricing in about a 64,5% chance of a 75 — basis — point rate hike at the next Fed meeting this month.
Spot gold fell 0,83% to $1 723 per ounce on Tuesday after thumping a one-month low of $1 720 on Monday; with US gold futures shedding 0,8% to close at $1 735 an ounce.
In the week ended August 26, gold eased 0,74% to settle at $1 750 per ounce from $1 763 recorded in the prior week, registering a sustained declining trajectory.
Gold fell 3,5% in July, leaving it down 2,9% in the year at US$1 753/oz. A strong US dollar and sticky real yields weighed on gold in the first half of July.
However, softer inflation expectations mid-month and jobless claims a few days later in the US elbowed the dollar and real rates down.
Gold and the USD share an inverse relationship. When the USD weakens against other currencies, the value of currencies of other countries increases and this upsurges demand for commodities like gold. Increases in demand for gold causes mounts in the price of gold.
The opposite is true when the dollar firms. All else being equal, a sturdier US dollar tends to keep the price of gold lower and more controlled as a stronger dollar makes bullion expensive for overseas buyers.
At the same time; rising interest rates dent the appeal of the non-yielding asset.
Going forward, gold will likely continue to face pressure as it will have to deal with higher interest rates. However, the yellow metal could also benefit from recession risk, a price-responsive physical market, already scaled-back positioning and higher inflation.
Two-year US Treasury yields rose to a 14-year high on Tuesday as traders weighed in on the Fed’s next move. Notably, the yield on the short-term two-year Treasury note rose as high as 3,497%, its highest since 2007.
At the start of this year, The Gold Council gave two contrasting possibilities that would weigh on the price of gold:
“Gold will likely face two key headwinds during 2022: higher nominal interest rates and a potentially stronger dollar.
However, the negative effect from these two drivers may be offset by other supporting factors, including high, persistent inflation, market volatility linked to Covid-19, geopolitics, and robust demand from other sectors such as central banks and jewellery.
Against this backdrop, gold’s performance during 2022 will ultimately be determined by which factors tip the scale.”
Gold finished the 2021 fiscal year approximately 4% lower (than the 2020 outturn), having closed at US$1 806/ oz.