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Gold prices on Friday braced for their most significant monthly fall since February, lingering at levels not seen in over six months. The primary catalyst behind this decline is the looming prospect of higher-for-longer interest rates, driven by the anticipation of a widely watched US inflation report scheduled for later in the day, according to a Reuters report.
If we look at numbers, spot gold was up 0.1 percent at $1,866.19 per ounce by 0230 GMT, while US gold futures rose 0.3 percent to $1,883.30. In the domestic market, the price of 24-carat gold dipped Rs 650 during Friday’s early trade, with ten grams of the precious metal selling at Rs 58,800. The price of 22-carat gold fell Rs 600 to Rs 53,900.
The trigger
The gold market has closely followed the Federal Reserve’s messaging, particularly regarding the prolonged maintenance of interest rates. As Nicholas Frappell, Global Head of Institutional Markets at ABC Refinery, stated in a Reuters report, “Definitely, the longer part is the most important element of higher-for-longer.”
This sentiment aligns with Richmond Fed President Thomas Barkin’s recent statement, suggesting uncertainty about the need for further monetary policy changes in the coming months.
Higher interest rates increase the opportunity cost of holding gold, a non-yielding asset priced in US dollars. The market has responded to data indicating robust growth in the US economy during the second quarter, further fueling expectations of interest rate hikes.
The outlook
Gold would require a combination of a weaker dollar and lower bond yields to regain its foothold above $1,900 per ounce. In a Reuters report, Matt Simpson, a senior analyst at City Index, said that this would necessitate notably weak inflation figures and a scaling back of hawkish Fed expectations.
However, the current market sentiment suggests this outcome is unlikely in the near term.
According to a recent report by Emkay Wealth Management titled “Navigator,” the near-term gold price trajectory is expected to remain within a range defined by strong support levels at $1,830 and $1,880. Gold exchange traded funds (ETFs), which witnessed outflows over the past two months, have recently seen some inflows that have provided support to the precious metal. The movement of gold is closely linked to the trajectory of US interest rates and the direction of the US dollar.
In the domestic market, the price of gold has experienced a decline. Jaydeep Banerjee, Cofounder of Dvara SmartGold, emphasised that gold continues to play a vital role in investment portfolios and retains its position as a preferred asset for central banks.
“Despite price fluctuations, gold has demonstrated its ability to dampen volatility, particularly during times of financial instability,” he told CNBC-TV18.com.
Banerjee forecasts that in the coming months, gold’s performance in the domestic market may vary between Rs 52,000 and Rs 70,000 per ten grams due to persistent inflationary trends and ongoing global geopolitical uncertainties.
Gold demand in the upcoming festive season
Gold is deeply ingrained in the cultural and societal fabric of many communities, and it plays a central role in various rituals and celebrations.
Jaydeep Banerjee highlights its significance in the upcoming festive season, stating, “Gold is an emotional buy. It offers both cultural and financial well-being. It will play a significant role during festivities, and gold ornaments will continue to be worn for important ceremonies and occasions.”
With Diwali and the marriage season approaching in India, where weddings alone contribute to approximately 50 percent of annual gold demand, the demand for gold is expected to remain robust.
Is gold a safe investment bet now?
Banerjee believes that for a substantial portion of society, gold represents stability during times of uncertainty. It is considered a scarce yet highly liquid asset. While gold may exhibit short-term volatility, its long-term outlook is positive. Banerjee anticipates that gold will gradually rise to $3,500 and beyond over the next two years, making it a valuable addition to diversified investment portfolios.
In the domestic market, gold has delivered an average return of 13 percent over the last five years, showcasing its resilience to shocks and turbulent global events. Consequently, Banerjee suggests that gold will not only continue to perform well but may even outperform other asset classes in the long run.
“Gold is highly recommended and must be added to diversify a portfolio,” he suggested.