Gold Rates: What Should Gold Investors Do When The Fed Starts To Raise Rates?

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Spot gold has fallen more than 6% since the end of 2020. The attractiveness of the appeal of safe-haven securities and hopes of reduced fiscal stimulus have kept gold from holding on to its gains this year. However, rising inflation and the US Federal Reserve’s decision to delay hike interest rates provided less price support.

Gold hit a record high of $ 2,072.49 an ounce in August 2020. Since then, it has been trading in a narrow range of $ 1,959 to $ 1,676 in the international market. Despite a weak rupee and rising physical demand, domestic prices also traded unstable with a slight negative bias.

The precious metal started the year near $ 1,950 an ounce, but concerns over investment demand brought it down to $ 1,676 an ounce in March. It later remained within a narrow range, as traders continued to watch the impact of the pandemic on the global economy and central bank policies on reducing monetary stimulus.

The US Federal Reserve has started to reduce the pace of asset purchases, but has indicated it will not rush to raise interest rates this year. Previously, the massive US fiscal stimulus package to support the virus-stricken economy had pushed up precious metal prices. Economic stimulus usually pushes up gold, as the metal is seen as a hedge against inflation and currency depreciation.

Investor sentiment also turned to stocks and other risky assets as the Covid-19 pandemic was under control, which has improved global economic activities.

The Federal Reserve’s decision to gradually cut stimulus and soaring inflation accelerated the dollar’s rally, further limiting the appeal of the yellow metal. Robust growth prospects and strong economic figures further helped the greenback. A rise in US Treasury yields has also strengthened the US currency this year.

In the domestic market, futures prices have fallen by around 7% so far from when they were trading at Rs 51,875 per 10g, its highest level tested in January. Despite a weak rupee and increased physical market demand, prices were weighed down by uncertain feelings abroad. Meanwhile, India continues to be the second largest consumer of gold in the world and imports continue to grow despite high import tariffs.

The outlook for gold for next year is likely to be bleak. Prices may find support in the first few months, but downward pressure is likely when the Fed begins to raise interest rates.

At the last policy meeting, the Federal Reserve decided to end its buying of bonds during the pandemic and planned three rate hikes next year. Policy decisions by other major central banks are also believed to influence sentiment for the yellow metal.

In the changing economic environment, investors are likely to look to digital currencies as a store of value and a hedge against inflation, which could further reduce the safe appeal of precious metals. In addition, increased global economic activity, a firm dollar and the easing of pandemic tensions have also put pressure on prices. However, a sign of a strong rebound in physical demand, especially in major Asian hubs, could ease the heavy sell-offs.

Technically, prices remain capped at $ 1,960-1,650 per ounce, but breaking one side would suggest further directional moves. In the domestic futures market, strong resistance is observed at Rs 50,050 per 10g and support is placed at Rs 43,200.

(The author, Hareesh V, is Head of Commodities at Geojit Financial Services. His views are his own.)


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