Gold price outlook: Geopolitical uncertainties assist gold but traders remain cautious

Spot gold fell to a four-month low, correcting more than seven percent from May, when it reached close to its all-time high. A steady US dollar and expectations of more rate hikes from the US Federal Reserve weighed on the prices of the yellow metal.

A similar selloff was witnessed in domestic gold also. In the futures market, prices edged lower from an all-time high of Rs 61,845 per ten grams to below Rs 58,000 last week. Weak overseas sentiments, a relatively strong Indian rupee, and a decline in demand due to record-high prices outweighed the prospect of the commodity.

Market sentiment plays a crucial role in shaping gold prices. The Federal Reserve’s communication regarding its policies and plans can sway investor confidence and influence the demand for gold as a hedge against economic uncertainty.

Recently, the US Fed Chair Jerome Powell signalled more rate hikes this year to cool price pressures. Now, economists foresee a 25-basis point rate increase in the July meeting and another 25 bps increase in November.

The performance of the US dollar is closely linked to US interest rate decisions. An increase in interest rates generally makes the US dollar more attractive to investors. Higher rates can boost the demand for US assets, such as Treasury bonds, as they provide a higher return.

In the domestic market, the all-time high prices have had a noticeable impact on the physical demand for the commodity. Increased gold rates have reduced the affordability of gold jewellery and deterred consumers from making significant purchases, causing a decline in demand.
Higher prices also hampered the investment demand. As a popular investment option, individuals often invest in gold bars, coins, and ETFs as a store of value and a hedge against inflation. However, the record-high prices have dampened investment demand as potential buyers are reluctant to enter the market at such elevated price levels. Outshining equity markets has also prompted investors to bet on riskier assets in recent times. A correction in the rupee against the US dollar further weighed down domestic gold prices. As gold is primarily traded in the US dollar globally, a strong rupee decreases the cost of importing gold into the country.

The recent jitters affecting China’s economy also affected the demand for gold. The key demand indicator for the precious metal in the country suggests declining demand in the past few months. However, China is the largest consumer of gold with an average usage of more than 1000 tonnes in the past ten years.

Looking ahead, the ongoing geopolitical and economic uncertainties like higher inflation, economic jitters in China, and the pandemic-related economic distortions amid Russia – Ukraine war continue to offer support to the metal. Hopes of a demand recovery from India may also contribute to the trend. However, traders remain cautious while taking big bets as the central banks’ policy measures and performance of US assets like the US dollar and bonds could dampen the sentiment of the bullion.