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Will twin storm of higher rates and sluggish demand weigh down on gold?

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The pandemic year- 2020 was known for the start of the supercycle in yellow metal- Gold. However, after making a peak above $2070 last August, it is now down by more than 12 percent from the high. The reason for the last year's bullish move was safe-haven demand, inflation hedge, and weakness in the US dollar.

Will twin storm of higher rates and sluggish demand weigh down on gold?
Is Gold a commodity, currency, or investment asset? Gold is the only thing on the earth that holds all these three properties. It is mined, just like any other commodity. It is an anti-fiat currency but has purchasing power during financial turmoil and geopolitical tensions and it also holds a tangible asset quality. In the modern world, the prices are derived based upon the risk-on/risk-off sentiment more rather than actual commodity usage.
The pandemic year- 2020 was known for the start of the supercycle in yellow metal- Gold. However, after making a peak above $2070 last August, it is now down by more than 12 percent from the high. The reason for the last year's bullish move was safe-haven demand, inflation hedge, and weakness in the US dollar.
Although, it didn’t last long as US yields started to recover along with a strong rebound in riskier assets after the flood of liquidity by major central bankers. Undoubtedly, the time has come for US Fed to announce tapering as the economy is back on the track. Though for now, Powell in his Jackson Hole speech ignored to talk on the timeline of tapering. In an immediate reaction, buyers flocked back to Gold and prices jumped by more than 1.40 percent as US dollar plummeted.
How gold prices are reshaping its future? Will it continue to recover or fall back? Let’s analyze each factor and decide outlook.
Greedy US growth & inflation:
The US inflation is currently running as hot as 5.4% with a growth of more than 6%. Usually, in an environment where the growth is tremendous, gold prices used to remain under pressure despite thriving inflation as an optimistic outlook gives the confidence to choose riskier assets over inflation hedge assets. Further, since start of the talk about the tapering or tightening, the momentum in gold has been subdued on account of stronger demand for fixed yielding assets like US treasuries. Thus, rising future rate hike probability will erode inflation expectation and real rates will start turning its page into positive territory. The broad recovery in real rates could shift investment flows from Gold to fixed income.
Sluggish demand from Asian market:
The diverging picture between few Asian markets and the US market depicts how the COVID could impact the economy if not managed properly. Despite a rise in US cases, the economic activity is continuing its activity at its steady pace. The only differentiating point is the “vaccination rate”. The US is amongst those who are having a vaccination rate of more than 50 percent, whereas many Asian markets are struggling to reach even the 30 percent mark. This impedes the demand outlook. That apart, physical demand remained weak because of the lockdown, fewer tourists, and a quiet retail side shopping.
If we talk about gold demand in India, then it has been subdued in the recent weeks as jewellers held off purchases, hoping for a correction in prices. The premium which the dealer charges also fell up to $2 per ounce over official domestic prices, inclusive of 10.75% import and 3 percent sales levies. Furthermore, jewellers are unhappy with the new hallmarking rules and specifically the norms around the Hallmarking Unique ID (HUID). Last week they went on strike against the arbitrary implementation of HUID, which they think impractical and unimplementable.
Falling SPDR holding:
The holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fell up to 1,001.72 tonnes, the lowest since April 2020. The ETF has a market value of $57.90 billion. The reduction in the gold holdings suggests that the prices are near their short or medium-term top and could correct from the current levels.
Technicals on Gold prices:
The daily chart of the international spot gold prices suggests that prices are heading towards their immediate hurdle of $1835 levels. If that is taken out then the next resistance will lie at $1860 levels, where ascending triangle trendline is located. From those pullbacks, prices could resume their downtrend towards $1750 and $1680 (strong support) levels. Below $1680, prices could give pattern breakdown and could eye further steep fall.
Outlook:
Summing up an article short, one can say that gold prices are likely to face twin storm clouds of the possibility of US tightening and threats to physical demand amid lacklustre demand outlook from Asia. Bulls could enjoy a rally a bit up to $1835 or $1860 levels before the tapering announcement. Post that they will need to really revisit their positions as bears could dominate and prices could resume a fall towards $1750 and $1680 levels. The real rates are expected to recover like in 2013 when Fed had announced tapering and stronger DXY backed by upbeat US data could erode demand for the safe-haven or non-yielding asset like Gold. Broadly, one can say downswings in the gold prices are likely to resume anytime soon.
—Amit Pabari is the managing director of CR Forex Advisors. Views expressed are personal.