Gold ends 3-week losing streak; sees silver lining as US dollar struggles atop

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Gold traded in a wide range but managed to end with a modest gain last week, ending its three-week losing streak. Gold traded in a tight range near $1,700 an ounce and ended the week with a modest gain of 0.3%.

Gold along with other commodities edged higher last week as market participants moved from the safety of the US dollar to riskier assets.

With the US dollar being the primary driver of commodity prices, the focus may continue to be on the US economy and the Fed’s monetary policy stance.

The US dollar index hit a new 2002 high last week but failed to hold on to the gains and ended down for the week marking its first fall in four weeks.

The US currency weakened amid less appeal for safe havens and as market participants weighed the US Fed’s monetary policy stance relative to other central banks.

Concerns about global growth are high amid disappointing economic data, China’s fight against the spread of the virus and monetary tightening by major central banks.

Despite this improved risk sentiment, equities and commodities managed to post gains. Easing inflation expectations and some upbeat economic data helped revive risk sentiment, while market participants welcomed monetary tightening from major central banks.

Inflationary pressure remains high globally; however, the recent correction in energy and commodity prices has somewhat alleviated market concerns.

Crude oil hit its lowest level in January last week on demand concerns and an unexpected rise in crude oil inventories in the United States.

Natural gas prices in Europe ended lower for the second consecutive week and tested their lowest level in almost a month.

Natural gas prices fell sharply amid an improving inventory situation and as European Union leaders intensified efforts to control gas and electricity prices and reduce consumption.

EU leaders are considering a number of measures such as gas price caps, voluntary consumption cuts, etc., but there is uncertainty about the effectiveness of these measures.

Russia has already warned that it will halt supplies to countries that impose price caps.

Central banks around the world have stepped up their efforts to control inflation. Higher interest rates mean tighter liquidity and higher borrowing costs, which is negative for all asset classes.

However, market participants are now looking beyond their current stance to assess whether the economic slowdown and some improvement in inflation can help central banks slow down.

Comments from US Fed officials bolstered market expectations that the central bank could raise the interest rate another 75 basis points at the next meeting in September.

Amid other central banks, the European Central Bank also accelerated the pace of monetary tightening and raised interest rates by 0.75% to control inflation, and kept options open for further hikes.

Canada and Australia also raised interest rates to contain price pressure.

While the US dollar continues to be the primary determinant of gold’s price, the metal is also challenged by a lack of investor buying and a weakening consumer demand outlook.

Gold holdings with SPDR ETF fell to March 2020 lows, showing that investors continued to pull out of the metal in the absence of a clear price outlook.

Concerns about the Chinese economy also weighed on the outlook for consumer demand. The outlook for China remains clouded. Emphasis on virus-related restrictions to control the spread of the virus, a measure that is hampering economic activity.

After three weeks of heavy losses, gold managed to stabilize near the $1700/oz level. Lower prices have attracted some bearish buyers, but we need to see if this rally can continue, and the biggest challenge is the US dollar.

The sharp rise in the US currency has left it vulnerable to profit taking, but it could continue for a long time as the focus remains on the Fed’s next meeting on September 20-21, with the central bank poised for another big hike. rates.

(The author is Associate Vice President – Commodities Research at Kotak Securities)

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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