Gold hits 3-month high as Fed rate outlook shifts; India demand picks up

Reasons behind the rally

The treasury’s market intervention has also weakened the dollar due to an infusion of liquidity in the market, making the precious metal more affordable for investing in other currencies such as the rupee. The dollar index, which measures the dollar’s strength against a basket of currencies, fell to a multi-month low.

“The recent yield rise suggests that investors no longer assume the Treasury supply will be absorbed effortlessly. Instead, the balance between supply and demand has become an increasingly important determinant of pricing,” noted Johan Palmberg, Senior Quantitative Analyst at the World Gold Council (WGC). “Our view is that the positives would likely outweigh the negatives and likely invite substantial interest in gold,” he added.

“Gold seems to be back in fashion with investors as rate hike concerns have eased and the dollar index has subsided. It looks like gold may rise to the $4,900-$5,000 levels if things keep going this way. We might see even more interest in it as an alternate asset,” an analyst tracking commodities at a domestic research firm said.

While the Treasury intervention last week fueled gains, gold had already been rising prior to that as prospects of a rate hike by the Fed eased. The market is now pricing in just a 38% chance of the central bank hiking interest rates in its meeting this month, compared to a nearly 84% chance a month ago.

Chances of the Fed maintaining a status quo on rates for the remainder of the year have also increased recently, after the last few meetings showed that some of its members had favoured a rate hike.

“The upcoming mid-term elections are coming in (in November), and there are increasing signs that the economy is slowing if you look at recent job market data. So, many people are now starting to question whether rate hikes can happen, and even if it does happen, people don’t expect it to be a series of rate hikes,” according to Harshal Barot, Principal Consultant for South Asia and Middle East at Metals Focus.

While inflation levels have moderated a bit, growth has slowed down, and labour data has moderated, possibly forcing policymakers to maintain a pro-growth stance for now, the outlook remains clouded, with eyes on more data.

“It (the outlook) is turning more bullish, but there will be a lot of volatility in the way because we don’t know the outcome of the war and all other variables. But for now, it seems that prices have turned a corner,” said Barot.

Market participants also look forward to Fed Chair Kevin Warsh’s speech at the Jackson Hole symposium later this week on Friday for any cues on the central bank’s interest rate trajectory.

What this means for Indian market

The demand for gold in the Indian market has picked up as the festive season draws close, spurred by the correction in prices since hitting a peak around late January. A recovery in demand for the jewellery industry and continued interest in gold as an investment avenue have driven this demand, said the WGC.

“Jewellery demand has reportedly strengthened, as consumers viewed recent price action as a buying opportunity. Industry feedback suggests that deferred purchases returned to the market, resulting in higher footfall and a recovery in demand beyond essential wedding-related purchases,” noted Kavita Chacko, head of research for India at the WGC, in a report last week.

However, while it is positive to see gold prices recover after a phase of correction, prices need to consolidate in a particular range in order to boost investor confidence and ease uncertainty, market participants said. That would depend on whether the Treasury would take further actions in the bond market and the direction taken by the Fed.