The recent hawkish comments from the US Fed chairman let the gold investors take a cautious approach, pulling down prices to near $1800 an ounce this week. Easing fears of a global recession, higher US bond yields, and a three-month high US dollar also weighed down the sentiment of the precious yellow metal.
Gold surged to an eight-month high of $1960 an ounce last month but now it has corrected by more than 7 percent. A similar trend was witnessed in domestic futures, with prices falling below Rs 55000 per ten grams from their all-time high of Rs 58826.
The US Fed chairman recently cautioned that interest rates may be pushed higher than previously expected. These comments fuelled worries about a potentially larger rate hike in the coming meeting.
The recent robust economic releases have given room for the US central bank to take aggressive measures to taper inflation, which remains far from their targeted levels.
The Fed increased rates seven times last year, and the speed has been unmatched since the 1980s. In 2023, US policymakers are adopting a new approach by increasing rates at a slower and more deliberate pace. In February, the federal fund rates were increased by a quarter of a percentage point to 4.5 to 4.75 percent.
The US rate hikes continue to cast shadows on gold’s uptrend potential. High-interest rates usually makes less attractive to investors.
A recovery in the US dollar and rising bond yields also weighed on the outlook for gold. After hitting a two-decade high in September, the US currency shed about 6 percent early this year but now it has gained momentum on rate hike expectations. As gold and the US dollar are inversely related, a strong dollar causes selling pressure in gold. A firmer dollar attracts investors to the perceived safety of the US currency which is now more attractive with higher interest rates.
Geopolitical tensions and a slowdown in the global economy usually lift the demand for gold as it is considered a safe investment during the periods of uncertainty. Earlier, the Russia – Ukraine war and fears of a recession in key economies had offered firm support to prices.
However, currently, the year-long war between Russia and Ukraine has negligible impact on gold prices. Likewise, recession fears are now far and wide as many key economies show signs of recovery, reducing the appeal for gold.
Looking ahead, uncertainty over Fed’s next action would keep gold prices volatile. There are chances that the US central bank may hike rates until they lower the overly high inflation levels back to the target. This may continue to put pressure on gold. However, a firm physical demand from China and India would limit major selling pressure on prices.
On the technical side, there is stiff support placed at $1800 and inability to break the support may see recovery upticks. However, such moves are least expected to break the major hurdle of $1970 level. Meanwhile, a direct drop below $1800 would trigger another round of liquidation that may take prices to $1740 followed by $1620 levels later.
In the domestic market, immediate support is seen at Rs 54000 per ten grams. Prices may liquidate further if the support is broken. Consistent trades above Rs 57000 are required to trigger fresh rallies.
(The author, Hareesh V, is Head of Commodities at Geojit Financial Services)