What makes gold more attractive for this Akshaya Tritiya than rising odds of a hard landing in US
As per Hindu mythology, Akshaya Tritiya is considered to be an auspicious day to buy gold jewelry. The devout believe that buying gold and worshipping Lord Kuber on this day brings prosperity. This year, Akshaya Tritiya falls on 22nd April 2023.
Well, unlike the previous times, this time we have a looming recession in the West, stemming from aggressive rate hikes by the central banks. Inflation remains at elevated levels, leading to stagflation concerns.
Credit conditions are tightening, following the failure of multiple US regional banks. Tech layoffs are on the rise. Needless to say about the ongoing geo-political tensions. And, it’s only a matter of time before the Fed hits the pause button.
Despite the highest inflation in 4 decades, slowing growth, and heightened geo-political tensions, gold’s performance in 2022 has disappointed many investors.
The major reason for this lackluster performance was because of a stronger dollar index. We believe that a decline in the greenback is going to be the key trigger for gold prices in FY24.
US CPI might ease sharply during the second half of the year if shelter inflation cools down and the economy enters into a recession. Labor market is a lagging indicator and is the last data point to turn in the cycle. US weekly jobless are rising and are at the highest since August 2022, suggesting some softening in the US labor market.
The manufacturing sector has been in contraction since November 2022 and shows no signs of improvement. With the ongoing rate hikes and tightening credit conditions, the odds of a hard landing are rising and the worst might be ahead of us.Minutes from the March FOMC meeting included a presentation from staff members on potential repercussions from the failure of Silicon Valley Bank and said the fallout from the US banking crisis is likely to tilt the economy into recession later this year.
Meanwhile, Fed’s beige book released in April said that the US economy stalled in recent weeks, with hiring and inflation slowing and access to credit narrowing. This is in contrast with the March Beige Book published before Silicon Valley Bank’s failure, which displayed a resilient economy.
Gold is also among the biggest beneficiaries of the rapid pace of de-dollarization happening globally.
The higher for longer rates theme is gaining traction for now, as banking crisis fades and core inflation remains sticky.
Fed officials are maintaining a hawkish stance. In the latest comments, Fed Bank of Cleveland President Loretta Mester signaled support for another rate hike to quell inflation while flagging the need to watch recent bank stress that could crimp credit and dampen the economy.
If there are no signs of a significant decline in core CPI, markets might start pricing in fewer rate cuts for the year, compared with almost 50 bps expected now. However, a higher rate means more pain for the economy going forward, bolstering our medium to long-term bullish outlook.
The yellow metal is poised for a second consecutive weekly loss, amid the rising greenback. US Q1 GDP, Bank of Japan monetary policy, and the Fed’s preferred PCE price index might be in the spotlight for the coming week.
With the FOMC meeting in focus and rising prospects of higher rates for longer, we don’t deny the odds of some pullback in gold prices during the near term.
Having said that, investors should keep in mind that it’s difficult to catch the bottom and can benefit from this Akshaya Tritiya as an opportunity to accumulate the metal.
(The author is VP-Head Commodity Research, Kotak Securities Ltd)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)