Dampened demand for gold over rate hike


Last week gold ended with a nearly 0.35% gain at $1,989.65, failing to close above $2,000 throughout the week. Concerns about rising inflation continued after 1Q A core PCE QoQ and 1QA GDP Price Index came in higher than expected.

According to the Bullion King of India, “These damp sentiments continued as the week opened. Gold prices moved little in early Asian trade on Tuesday, hovering well below key levels as anticipation of a likely interest rate hike by the Federal Reserve supported the dollar and dented demand for the yellow metal.”

Federal Reserve’s policy meeting due on 2-3 May this week remains each investor’s focus. The Fed is expected to deliver another 25 basis point rate hike on Wednesday amid strong US economic data and persistent inflationary pressures. Data showed that US consumer sentiment improved in April, while core PCE inflation exceeded forecasts in March. But there is uncertainty about rate hikes and markets are not sure whether the central bank will signal a pause in its rate hike cycle.

Prithviraj Kothari, Managing Director, RiddhiSiddhi Bullions Limited, “This has kept demand for gold limited, given that rising interest rates push up the opportunity cost of holding non-yielding assets. Bullion is known as a hedge against inflation and economic uncertainties, but rising rates tend to diminish demand for the zero-yielding asset. Markets were also watching for a potential U.S. debt default, especially as a deadline for the government to raise the debt limit approaches. Treasury Secretary Janet Yellen warned of a potential default by as early as June 1.”

According to Prithviraj Kothari’s view on gold, “Gold has struggled to hold the $2,000 an ounce level for nearly three weeks, as the yellow metal consolidated gains after surging to near-record highs earlier in April. The short-term and near-term future of gold is both uncertain and indecisive. The next 18 months will be especially risky as the U.S. embarks on the 2024 election season.”

The political timetable of the election cycle between now and the 2024 elections in the United States and Taiwan will likely lead to more push-the-limit anti-Chinese aggressive foreign policy from the US.

Fears of the Fed, coupled with a stronger dollar and yields will continue to see limited safe-haven demand for gold, even as concerns over a U.S. banking crisis were renewed by the emergency takeover of First Republic Bank. The future path of the yellow metal is likely to be determined by the Fed’s stance on interest rates, any new developments in the banking crisis, essential decisions before the election campaigns, and most importantly the US-China ties.