Gold's bullish run to continue amid US dollar dip, Fed’s stance

Average price of 10 grams of gold is around Rs 62,000

gold-rep-pti Representational image | PTI

The last few days has been buzzing with excitement regarding the gold prices which have touched an all time high during the last six months. Though the price of 10 grams of gold varied across different cities in India, the average cost was around Rs 62,000. Reports point out that 10 grams of 24-carat gold cost around Rs 63,390, while the same quantity of 22-carat gold was around Rs 58,110. 

Experts with whom THE WEEK spoke to say that most of the price action was driven by a series of macroeconomic data and market sentiment that is discounting a pause in a rate hike cycle. 

“Marking an all time on domestic front, and close to seven month high on COMEX, the gold posted 2.5 per cent gains in November. There were some updates regarding Israel and Hamas agreeing to a limited cease-fire and free a few hostages, however there were no official statements regarding an end in their dispute giving limited jerks to the market. Dollar index last month was down by more than 3.5 per cent while US 10-year treasury yield fell from a 16-year high of 5 per cent to 4.2 per cent mark. Recent economic data points also supported the rally for gold and silver. Existing home sales, core durables goods orders data, US preliminary manufacturing and services PMI were released lower than estimates, supporting an up-move in gold and silver prices. Preliminary PMI data from the UK and EU were also reported slightly higher weighing on dollar index,” said Manav Modi, Analyst, Commodity and Currency, Motilal Oswal Financial Services Limited (MOSFL).

He added that the Fed officials in the US expressed little urgency to raise interest rates again, along with their willingness to tighten monetary policy further if warranted by new data. 

“Minutest from Fed’s November meeting confirmed that all officials are still committed to proceeding ‘carefully’ on future rate decisions, they debate whether they have squeezed the economy sufficiently to get inflation back down to central bank’s 2 per cent target. However, market participants are discounting a pause in December meeting and a rate cut in March 2024 as suggested by CME Fed-watch tool supporting safe haven assets,” remarked Modi. 

This expert further pointed out that the economic data showing the overall strength of the economy is very important to keep an eye on. “Latest US GDP data was reported better than expectations showing resilience of the economy, but consumer confidence, retail sales, PMI numbers are not very optimistic for the economy. Tussle between Fed official’s comments and market participant’s optimism regarding a pivot in Fed’s current monetary policy stance are triggering volatility in the market. Continuous fall in dollar index and US yields also could support the rally in safe haven assets. Any updates regarding geo-political tensions will continue to be on radar. We could see dips in near term on the back of some profit booking, however those levels could be used as an accumulation zone,” said Modi. 

Other experts do point out that gold has been in the bullish run in the last few weeks, all thanks to the positive sentiments for the commodity on anticipation of a softer stance by the US Federal Reserve and expectation of interest rate cuts in the next calendar year. 

“The dollar index has also retraced to the 103 zone, which will also favour the yellow metal in the near-term period. All the negatives are factored into the price, and a major trigger may further support the prices. The recent uncertainty in the Middle East and the rising geopolitical tensions are also supporting the prices on any corrections. The outlook for the coming weeks looks good. Any dovish commentary from the Fed Chair in the next meeting may further boost positive sentiments. Any declines in the price are expected to be bought by the market players as the overall trend looks extremely positive,” remarked Atul Parakh, CEO, Bigul.  

Market experts are of the view that price of gold, like any commodity or security, is driven by demand and supply. 

“Change in allocation of gold in foreign reserves of countries, interest rate, inflation, geopolitical situations and exchange rate are primary reasons that affect gold prices. It is very difficult to predict these situations in a short term. However, as inflation and global economy is slowing down and interest rates are expected to decrease, and as countries are likely to increase their allocation to gold in reserves, the probability of increase in gold price in short term is higher. In the long term, combining all these reasons with increase in geopolitical uncertainties and depreciation of Rupee (INR against US dollar), gold price is expected to increase, said Jigar Patel, Member, Association of Registered Investment Advisors (ARIA). 

Interestingly, gold had traded in a range of more than USD 100 rising from a low of USD 1,936 per ounce hit in Mid-November in spot to above USD 2,050 per ounce, witnessing a rise of more than 3 per cent in the November month. This was despite an end of geopolitical conflict between Israel and Hamas which failed to bring down the war premium in prices as traders started increasingly positioning for a hard economic landing and aggressive Fed policy easing next year. 

“Recent monthly macro data, including reports showing slower job growth and cooling consumer prices in October led to augmented safe haven appeal of gold with MCX prices rising to all-time highs in December futures to around Rs 6,2650 per 10 gm levels. Meanwhile, in international markets, it’s just 2 per cent away from its all-time highs of USD 2,080 hit in COMEX in May 2023. Meanwhile, moving ahead consumer spending in US is expected to grow at a weaker pace in the fourth quarter with this decelerating trend continuing in 2024. Home builder sentiments in US have also remained lacklustre which weakens the outlook for residential construction towards 2024. In the near term with dollar index already losing more than 3 per cent in the month, we might expect a slight bounce back in same. Also, US jobs number due next week could set the tone for an extended volatility in prices where spot gold is expected to trade in the range of USD 2,025 – 2060 per ounce in the next 2 – 3 weeks perspective. On MCX, prices could consolidate at higher levels amid an extended rally upto Rs 63,500 levels in February futures contract,” remarked Naveen Mathur, Director - Commodities and Currencies, Anand Rathi Shares and Stock Brokers. 


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