By Jigar Trivedi
The yellow metal steadied near $1,660 an ounce, remaining sideways for the fourth session on Friday despite getting whipsawed in the week, as the US inflation report bolstered bets of another rate hike by the US Fed. Earlier last week, a drumbeat of US policymakers reiterated the need to lift rates to restrictive levels and hold them there until inflation recedes, though some officials considered slowing the pace of increases based on the latest Fed minutes. Due to its weak position in an environment of rising interest rates, investors continued to shun gold and opt for the dollar as a safe store of value during these times of surging inflation and heightened economic uncertainties.
The dollar index held just above 112 after falling sharply, weighed down by improving risk sentiment that drove global equities roaring higher, while investors assessed red-hot US inflation data that cemented bets of another outsized Fed rate hike next month. Data released on Thursday showed that US inflation eased less than expected in September to 8.2%, while underlying prices excluding energy and food prices accelerated to a new four-decade high. Markets are currently betting that the Fed will deliver its fourth straight 75 basis point rate increase in November. The dollar nursed heavy losses against the euro and the sterling, with the latter also benefiting from speculations of a policy U-turn in the UK. Meanwhile, the greenback held firm against the yen after hitting a three-decade high overnight despite talks of more intervention from Japanese authorities.
Despite sticky inflation, real yields have also been climbing. 10-year real US yields have reached their highest levels in more than a decade and are firmly back in positive territory. Given the strong negative correlation between gold prices and real yields, it is not surprising to see that gold has struggled in this rising yield environment.
Chinese gold demand picks up
Chinese gold demand suffered earlier in the year due to the Covid-related lockdowns, particularly over 2Q22, which is when strict restrictions were in place across Shanghai and Beijing. According to WGC data, Chinese consumer demand was down 23% Y-o-Y over 1H22. However, the premium in local Chinese gold prices compared to international prices has grown more recently, suggesting that we are seeing stronger domestic demand coming through. Import data appears to back this up, with non-monetary gold imports hitting more than a four-year high in August and up 134% Y-o-Y.
Meanwhile, another key gold consumer, India, is expected to see stronger gold demand as we head towards Diwali in late October. However, whilst we may see stronger consumer demand, it is clear that price direction is driven by investment flows. And the outlook for this is only slightly positive in the short term. Comex gold has a strong support near $1,640 an ounce and MCX Gold December futures are expected to rise further to Rs. 51,600 per 10 grams.
(Jigar Trivedi, Senior Research Analyst – Currencies & Commodities, Reliance Securities. Views expressed are the author’s own.)