Gold weakens as Fed tightening concerns trump growth worries; volatility likely to continue

Gold traded well within the range seen for the last few days but ended lower marking its second weekly decline. Gold traded in a narrow range above $1800/oz and ended last week with a modest 0.6 per cent decline.

Gold has been stuck in a range as the central banks’ emphasis on monetary tightening has kept the pressure on prices while increasing debate about a possible recession has kept a floor to price.

The ongoing debate about the impact of monetary tightening on economic growth is unlikely to subside soon and this may keep gold rangebound.

The US Federal Reserve has increased the pace of rate hikes in the last few months and is expected to continue with aggressive moves until there are clear signs of easing price pressure.

Comments from the US Fed officials including Fed Chairman Jerome Powell have further cemented market expectations that tightening may continue in the near term.

In his testimony on monetary policy and economy, the US Fed Chairman, Jerome Powell stated that the fight to control inflation was unconditional which means that they may continue with rate hikes unless inflation comes under control.

The US Fed also acknowledged increasing growth risks. The Fed Chair clarified that the central bank is not trying to provoke a recession, but one was certainly possible.

A number of other Fed officials have also expressed support for continuing rate hikes and have raised the prospect of a recession.

Comments from the Fed officials indicate that the current priority is to get inflation under control and they are prepared to see some slowdown in economic activity.

While the US Fed has clarified its stance, the central bank may struggle to stick to its stance if there are serious signs of stress in the economy. While the US Fed has acknowledged the possibility of a slowdown, a number of industry players have also flagged risks of a recession.

Growth concerns got a further boost from mixed economic data from major economies. Manufacturing PMI data from US, Euro-zone, UK, and Japan showed that activity in the sector has slowed more than expectations. Consumer sentiment data from the US, UK, and Euro-zone also highlight increasing growth worries.

Inflation has become a major cause of concern globally and this has also increased gold’s appeal as an inflation hedge. UK consumer price data released this week showed that consumer prices are rising at the fastest pace in 40 years.

On the other hand, the correction in crude oil and other commodities has eased worries about rising price pressure to some extent.

Crude oil has corrected more than 15 per cent from recent highs while copper prices have slipped to Feb 2021 lows. The move out of commodities shows that market players expect efforts to bring inflation under control to materialize.

Amid increasing growth risks, we have seen increased demand for safe havens like US Treasury bonds, Japanese Yen, and Swiss Franc and this has benefitted gold as well.

The US 10-year bond yield topped near 3.5% lately but eased back close to 3% this week as safe-haven buying pushed bonds higher.

The Japanese Yen has also steadied after testing 1998 lows. Franc has also recovered sharply since the central bank unexpectedly raised its interest rate.

However, gain in the equity market despite growth and tightening has reduced gold’s demand as an alternative asset.

US equity markets edged up this week after three weeks of losses while Chinese equities ended higher for the fourth consecutive week.

Choppiness in the US dollar has also bound gold in a range. The US dollar continues to remain supported by Fed’s tightening outlook however concern about the health of the US economy and the monetary tightening stance of other central banks has limited upside.

Gold may remain in a broad range as growth worries will counter tightening expectations; however, we are bound to see continuing volatility as market players may react to economic numbers and central bank comments to gauge the health of the economy as well as the pace of the future rate hikes.

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

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