Even though the markets have hit multiple highs, yellow metal gold has still managed to jump around 8 percent in 2023 so far. Experts believe that the growth outlook for the precious metal remains robust even though the risk appetite for equity investors has improved.
In a recent note, Emkay Wealth Management stated that the development in the US economy is the key factor, which will provide further cues for the yellow metal.
Let's take a look at the factors that will impact gold prices going ahead:
The Inflation worry: As per the brokerage, Gold prices came down to $1,911 after fresh data indicated that the US Consumer Confidence in June rose to the highest level in the last 18 months. Fed officials also said that there is enough room for the Fed Funds Rate to rise even beyond the 6 percent level, from the current range of 5.25-5.5 percent. The robust labor market and the low unemployment levels in the US are reflective of a relatively strong economy, and it may be interpreted to mean that the inflationary pressures are far from conquered, and could raise its hood again if left untreated. This has resulted in a fall in gold prices, it explained.
What had initially given support to gold prices was the uncertainties surrounding the growth prospects of the global economy. According to Emkay, the tight money policies pursued by the central banks are expected to pull down the rate of economic growth in most economies, and with a slowdown enveloping the larger economies gold attains the spotlight as safe haven and also as something that retains value even in uncertain times.
While gold is expected to hold well at the support levels, much would depend on the fortunes of the US economy, it added.
Rate hike and recession: The first point is that the recession may be a touch and go, and if that is going to be the actual case, then gold will be able to make only limited gains, cautioned the brokerage. The recent data from the US is still mixed. Second, there is still no final statement from the Fed on the trajectory of policy rates. It is still to evolve further over the next FOMC meeting. Third, the buoyancy created by money flowing into ETFs is missing at present. And finally, there will be limited diversification in the existing investment portfolios given the assessment that conditions will be the same across territories and a diversification away from the US or developed markets is not feasible at this juncture. Any further dips in gold can be opportunities to buy into, the brokerage suggested.
Interest in 2022: The institutional and central bank interest in gold is a factor that has lent strength to the metal in the last two years, informed Emkay. In 2022, central banks bought a record 1,136 tons of gold, valued at US$70 billion. This interest in gold is likely to be sustained during the course of this year too, it further stated.
Gold ETFs inflows: Gold ETFs have also witnessed inflows in the last three months, that is March-May, 2023. The higher probability of a rise in gold prices led to the inflows, Emkay pointed out. More than price appreciation, there were some other factors too which helped the yellow metal, like the US banking, the protracted debt ceiling negotiations in the US, etc. in the last few months. At present even the developments in Russia are viewed with interest for its consequences for safe-haven assets like gold, mentioned the brokerage.
The total gold holdings of all ETFs put together have touched 3,478 tons by end-May,2023, which is 19 tons higher MoM.
The Currency Factor: The brokerage further noted that the currency markets recently witnessed another occasion of a surge in the US Dollar. While there is some sluggishness in growth that has already set in, the general belief is that the US may avoid a full-fledged recession. The strength of the US Dollar would also depend on the direction of the monetary policy in other territories, especially Europe. It is too early for the ECB or the BOE to move on to a pause in the rate hikes as inflation is still elevated in Europe, with the BOE hiking the rates once again in the recent past. These incongruities may decide inter-currency alignments as data flows gather momentum in the coming weeks, rationaled the brokerage.
The Dollar Index: It is important to note that Gold prices, like other commodity prices, tend to move up as the US Dollar depreciates as these commodities are quoted in US Dollars. Therefore, in times of dollar depreciation, the probability of gold prices rising is quite high, it said. Technically, any rise in the index is capped at 103.90 and 106.30 for the time being. Any break of the index above these levels would require triggers like geo-political issues flaring up too soon. The support for gold prices is at $1,730, $1,680, and $1,630, in that order, informed the brokerage.
Currently, $1,930 and $1,960 are the support level and on the upper end there is a high probability of gold prices testing the $2,020 level and breaking through it, said Emkay.
"Gold prices have come down to support levels at $1,930 and $1,960 as the US Dollar eased a little due to the latest rate hike by the Fed. The gold prices are rallying on the positive commentary by the Fed of little risk of recession and a possible rate cut from next year. The Fed may hike rates one more time in CY23 depending upon the economic data," it noted.
Navneet Damani, Senior VP – Commodity Research at Motilal Oswal Financial Services.
Along with volatility in the Dollar index, weak economic data points, increase in expectations that the US Federal Reserve might soon hit a pause on its interest rate-hiking cycle is supporting an up-move in bullions. A broader trend on COMEX could be in the range of $1960- 2000 and on the domestic front prices could hover in the range of ₹59,650 – 60,300 could be expected.