Gold rallies 1.5% in a week; US Federal Reserve meet eyed

It was a non-consequential week for gold as market players remained non-committal ahead of the US Fed decision next week.

The price traded in a narrow range near $1850/oz for most of the week, but a late Friday rally helped the bullion gain about 1.5%.

Gold has recovered substantially from the lows set in mid-May. The debate about the monetary policy stance of the Fed and other central banks and a brief correction in the US dollar helped gold come off the lows. However, market players moved to the sidelines with a focus on the US Fed decision in the coming week. The US Fed is largely expected to raise the interest rate by 0.5% at its upcoming meeting on June 15.

Market players will be more focused on Fed’s economic projections as it will help gauge how long the central bank will continue on its current tightening path and its impact on economic growth.

There is no reason for the US Fed to alter its stance. US economic numbers have been mixed showing increasing challenges for the economy, however, labour market is still showing resilience.

Non-farm payroll data released earlier this month showed a slightly bigger than expected growth in jobs while the unemployment rate was steady.

Meanwhile, inflation data shows that consumer prices are still at elevated levels. The latest CPI reading also showed that prices rose at the fastest pace in 40 years in the month of May.

Comments from the US Fed officials have also indicated that the central bank may continue to raise interest rates unless inflation comes under control.

Gold yields no return, so a higher interest rate increases the opportunity cost of holding the metal. Fed’s monetary tightening stance has been a major challenge for gold for the last few months.

However, now other central banks have joined forces and are raising interest rates amid the increasing need to address inflation concerns.

With most central banks taking a hawkish tilt, trends in the US dollar and other currencies will be largely dependent on the outlook for interest rate differentials.

The US dollar index saw a brief correction last month, after testing 2002 highs, as market players shifted focus to other central banks and looked briefly at other cheaper safe havens like the Japanese yen and Swiss Franc.

The US dollar bounced back as the Fed is still expected to lead other central banks while the global growth outlook has worsened further.

A number of central banks were surprised with hawkish moves this week, but this did little to deter the US dollar. Australia and India raised key lending rates at a slightly faster pace than market expectations.

ECB also took a hawkish stance as it indicated the possibility of the first hike in July and said it could consider a bigger hike at the September meeting if the medium-term inflation outlook persists or deteriorates.

The US currency also seems to have reclaimed its safe-haven status amid increasing worries about global economic growth and persisting worries about the Chinese economy.

World Bank and OECD lowered their global growth forecast for 2022 citing uncertainty caused by the Russia-Ukraine war while inflation is expected to remain high.

Optimism about China rose in the last few days as Shanghai and Beijing lifted virus-related restrictions, however, uncertainty rose this week as Shanghai decided to lock down certain regions over the weekend for mass testing.

China’s strict adherence to Covid zero policy indicates that authorities may continue to use restrictions to control virus spread, a move that could hamper economic growth.

Despite the recent gains in the US dollar and bond yields, gold has managed to hold firm. Global growth worries have increased the safe-haven appeal while inflation concerns have made it a preferred way to hedge against rising prices.

Inflation concerns rose further this week as crude oil prices jumped to March highs on tightness concerns and as discussions over allowing Ukraine grain exports failed to materialize.

Gold rose sharply late last week, however, the price is still stuck in a broad range seen for the last few days and the next trigger may come from the Fed decision next week.

Fed’s monetary tightening stance has been factored into a large extent, so unless we have a major negative surprise from Fed, we may not see much downside in gold prices.

(The author is Associate Vice President – Commodity Research at Kotak Securities)