On Friday, June 18, gold prices climbed, imitating gains in international markets as investors made the most of buy-the-dip opportunities. As a result, gold futures on the Multi Commodity Exchange surged 1% to Rs. 47,387 per 10 grams.
On the other hand, silver futures surged to Rs. 68,440 per kilogram, representing a 1.24% increase. In the spot market, fine gold with 24-carat purity was valued at Rs. 47,560 per 10 grams and silver retailed at Rs. 69,520 per kilogram, as reported by India Bullion and Jewellers Association (IBJA).
Hawkish outlook impacts gold prices
Prices of these two precious metals were impacted significantly after the US dollar rose following Federal Reserve’s rate hike signals, which came earlier than expected.
Spot gold prices in the global market increased by 0.6% to $1,784.16 per ounce after retreating close to 5% last week. Silver prices also rose 1.1%, breaching the $26 mark. However, considering the entire week, it was down by 6%.
The Federal Open Market Committee (FOMC) meeting suggested that Federal Reserve will most probably raise interest rates earlier than indicated by previous guidance.
As per projections, there’ll be two hikes within 2023. The chair of the central banking system, Jerome Powell, revealed that the Federal Reserve could also start talking regarding a reduction of bond purchases.
Also, it might scale back the stimulus programme that provided support to the price of different assets.
Following hawkish comments of the Federal bank, the US dollar surged to a two-month high as it was on the path for its best weekly performance in almost nine months. Gold might be one of the best hedging tools against inflation.
However, when interest rates are increasing, the opportunity cost of holding this precious metal becomes higher as it pays no interest. Federal Reserve’s message also impacted ETFs as they recorded significant outflows. SPDR Gold Trust’s holdings dropped by 0.4% to 1,041.99 tonnes last Thursday.
COMEX drops nearly 5%
After COMEX gold plunged 4.7% to April lows, precious metal prices improved as investors resorted to value-buying and the US dollar’s recent gains came to a pause. Moreover, pandemic-related concerns and mixed economic data have also played a part without a doubt.
Nevertheless, ETF outflows are a strong indication of the reduced interest of investors and rise in expectations concerning the tightening of the Federal Reserve’s monetary policy. Thus, although gold is experiencing some relief rally, it appears that the precious metal might be out of favour unless the US dollar value undergoes correction.
Gold prices may not be strong as far as the short term is concerned. However, the fall in rupee and the increasing inflation rate might prevent a sharp decline in gold prices. In addition, investors must note that gold prices in India are also correcting in the physical market due to the restrictions on festivals and weddings presently.
Hence, for investors unsure of whether gold price will increase or decrease in 2021, it might be time to remain patient right now.