Gold along with other commodities edged up last week as market players moved from the safety of the US dollar to riskier assets.
With the US dollar being the key price determining factor for commodities, focus may continue to be on the US economy and Fed’s monetary policy stance.
The US dollar index jumped to a fresh 2002 high last week but failed to hold on to the gains and ended lower for the week marking its first fall in four weeks.
The US currency weakened amid reduced safe-haven appeal and as market players assessed the monetary policy stance of the US Fed against other central banks.
Global growth worries are high amid disappointing economic data, China’s struggle with the virus spread, and monetary tightening by major central banks.
Despite this risk sentiment improved and equities and commodities managed to see some gains. Easing inflation expectations and some upbeat economic data helped revive risk sentiment while market players took monetary tightening by major central banks in stride.
Inflationary pressure remains high globally; however, the recent correction in energy prices and commodities has eased market concerns to some extent.
Crude oil slipped to January lows last week amid demand concerns and an unexpected rise in US crude oil stocks.
European natural gas prices ended lower for the second consecutive week and tested the lowest level in nearly one month.
Natural gas prices fell sharply amid an improving stock situation and as European Union leaders stepped up efforts to control gas and power prices and reduce consumption.
EU leaders are considering a number of measures like price cap on gas prices, voluntary reductions in consumption, etc. but there is uncertainty about the effectiveness of these measures.
Russia has already warned that it will halt supply to countries that impose a price cap.
Central banks across the globe have stepped up efforts to control inflation. Higher interest rates mean tighter liquidity and higher borrowing costs which is negative for all asset classes.
However, market players are now looking beyond their current stance to gauge if economic slowdown and some improvement in inflation may help central banks to slow down.
Comments from the US Fed officials have further cemented market expectations that the central bank may raise the interest rate by another 75 basis points at the upcoming September meeting.
Among other central banks, the European Central Bank also fastened the pace of monetary tightening and raised the interest rates by 0.75% to control inflation, and kept options open for more hikes.
Canada and Australia also raised interest rates to bring price pressure under control.
While the US dollar continues to be the key price determining factor for gold, the metal is also challenged by lack of investor buying and weakening outlook for consumer demand.
Gold holdings with SPDR ETF have slumped to March 2020 lows which shows that investors have continued to move out of the metal amid a lack of clear price outlook.
Concerns about the Chinese economy have also dented the outlook for consumer demand. The outlook for China remains cloudy. Emphasis on virus-related restrictions to control the virus spread, a move which is hampering economic activity.
After three weeks of steep losses, gold has managed to stall near the $1700/oz level. Lower prices attracted some dip buyers, but we need to see if this recovery can continue, and the biggest challenge is the US dollar.
The sharp rise in the US currency made it vulnerable to profit taking however it may continue for long as the focus remains on the Fed’s next meeting on Sept. 20-21 as the central bank is all set for another major rate hike.
(The author is Associate Vice President – Commodity Research at Kotak Securities)
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