Gold marks 4th weekly gain as risk sentiment improves

Gold witnessed mixed trade and hovered in a range near $1800/oz level but still managed to end higher for the week. Gold gained 1.5% last week marking its fourth consecutive gain.

Gold’s four weekly rally shows bullish sentiment however it has come on the back of five weeks of consecutive losses. The sharp and mixed movement reflects lack of confidence in the market.

Gold edged up last week as part of a rally seen across commodities and equities. Market players shun the safety of the US dollar and moved to riskier assets amid increasing debate about Fed’s monetary policy.

The US dollar index ended lower last week marking its third decline in four weeks. The inverse relation between the US dollar and commodities remains strong and this may continue until we get more clarity about Fed’s monetary policy.

Fed Chairman Jerome Powell has indicated that the central bank plans to take a meeting-by-meeting approach and this has caused uncertainty in the market and market players are looking at economic numbers and central bank comments to determine Fed’s next move.

Market expectations of a sharp hike rose following the strong US jobs report released earlier this month. Market players however pared expectations of an aggressive move as US inflation data showed some signs of easing price pressure.

US consumer price rose 8.5 per cent on the year in July as against market expectations of 8.7 per cent growth. US producer price rose 9.8 per cent on the year in July as against forecast of 10.4 per cent growth.

Inflation expectations have also improved. US consumer sentiment data showed that 1-year inflation expectations have dipped from 5.2 per cent to 5 per cent, however, 5-year inflation expectations inched up from 2.9 per cent to 3 per cent.

With signs of improvement in the inflation situation, market expectations picked up that the Fed may slow down the pace of rate hikes. This led to a correction in the US dollar and shifted investor interest towards riskier assets.

While inflation data showed improvement, it is still well above Fed’s target levels and may not be enough for Fed to alter its monetary tightening stance. This was also evident from comments from Fed officials.

A number of Fed officials last week indicated that inflation is still at elevated levels and interest rate hikes may continue.

There is no change in Fed’s stance and rate hikes may continue however the improvement in risk sentiment shows that market players are expecting that the worst phase for rate hikes is over.

While market players are optimistic currently, we may see volatility continuing as market players may react to economic numbers and central bank comments as we move closer to the next meeting in September.

While the weaker US dollar has helped push gold higher, easing inflationary pressure may also reduce gold’s demand as an inflation hedge.

Apart from the US, India, China, Brazil, Germany and Japan also showed some improvement in the inflation situation.

Another challenge for gold is lack of investor interest. Gold has recovered more than 7 per cent from the lows set in mid-July; however, it has failed to attract investors as is evident from continuing ETF outflows. Also challenging gold’s gain are concerns about consumer demand in India and China.

Gold has managed to scale $1800/oz level which shows that bulls are more confident now however it may not continue for long if Fed officials continue to emphasise on aggressive monetary tightening.

The next challenge may come from the minutes of the Fed’s meeting which may give further direction to the Fed’s tightening debate.