Gold slips to April 2020 lows as US Fed likely to continue with aggressive tightening

Gold slipped 2.4 per cent last week marking its fourth weekly decline in the last five weeks and tested the lowest level since April 2020.

The ‘buy US dollar, sell riskier assets’ trend continued for another week as market players positioned for the upcoming Fed’s monetary policy decision on September 20-21.

The US Fed is likely to raise the interest rate by 0.75 per cent at the upcoming meeting and this was largely factored in.

Market players were looking at economic numbers to gauge the possibility of a bigger move at next week’s meeting as well as the Fed’s future stance.

The US inflation data and other readings did little to change the market perception that the central bank may continue with aggressive rate hike(s) and this pushed the US dollar higher pressurizing commodities at large.

The US dollar index slipped to over a 2-week low but recovered to end higher for the week marking its fourth weekly gain in the last five weeks.

Inflation data released last week showed that price pressure is easing but at a very slow pace making a case for the central bank to continue with monetary tightening.

The US consumer prices jumped to a 40-years high in June, but we have seen some improvement in the last two months

CPI rose 8.3 per cent on the year in August slightly slower than 8.5 per cent growth a month ago but was higher than market expectations of 8.1 per cent growth.

US producer prices rose 8.7 per cent on the year in August, a slight improvement after 9.8 per cent growth a month ago and slightly better than market expectations of 8.8 per cent growth.

US university of Michigan consumer sentiment data also showed improvement in inflation expectations. 1-year inflation expectations dipped from 4.8-4.6 per cent while 5-year inflation expectations eased from 2.9-2.8 per cent. 1-year inflation expectations topped near 5.4 per cent.

While the US Fed’s tightening expectations helped the US dollar recover from the lows, the US currency faced some challenges from the monetary tightening stance of other central banks as well as concerns about central bank intervention in the currency market.

The Bank of Japan has repeatedly indicated willingness to act to support the Japanese Yen which has slumped to 2008 lows against the US dollar.

Chinese yuan breached the 7 level against the US dollar for the first time since July 2020 and may prompt the central bank to take additional measures to support the currency.

Along with the strength in the US dollar, gold was also pressurized by weaker investor interest and concerns about consumer demand in China.

Gold holdings with the SPDR ETF plunged to March 2020 lows last week but we saw some net inflows late in the week.

Concerns about the Chinese economy are high amid stress in the property market and the struggle with the virus spread and this kept pressure on the yuan and Chinese equities.

China’s industrial production and retail sales data however showed some improvement while some cities eased virus-related restrictions.

Gold has already fallen sharply on expectations that the US central bank may maintain an aggressive tightening stance.

The US Fed is expected to raise the interest rate by 0.75 per cent and maintain an aggressive stance and this has been factored in.

Given the improvement, albeit slow, in the inflation situation, the pressure on Fed to act aggressively has reduced so there is little chance that we may see a major move by the central bank.

So, unless there is a negative surprise from the central bank, there is a possibility that we may see some recovery in the metal.

While the focus remains on the US Fed, the Bank of England and the Bank of Japan are also due to hold their monetary policy meetings.

BOE is largely expected to raise the interest rate by 0.5 per cent and may avoid a bigger move as inflation slipped back below 10 per cent level.

The Bank of Japan is expected to continue with an accommodative monetary policy stance but may acknowledge concerns about inflation and currency weakness.

Any hawkish stance by other central banks could also bring a halt to the US dollar’s sharp rise lending some support to commodities at large.

(The author is Associate Vice President – Commodity Research at Kotak Securities. Recommendations, suggestions, views and opinions are here own. These do not represent the views of Economic Times)