By Jigar Trivedi
Gold closed below $1,890 an ounce and registered a third weekly loss as it declined by $13 or 0.68%, coming under pressure from a rebound in the dollar and Treasury yields as investors continued to bet on further Federal Reserve tightening to bring decades-high inflation under control, even at the risk of some economic pain. The metal was down for the third week as the dollar held near its highest in 20 years against a basket of major currencies, while the benchmark US 10-year yield rose firmly back above 3%.
For the fifth week, the dollar index appreciated
The dollar index eased to around 103.4 on Friday, but remained not far from a 20-year high hit above 104 as investors continued to bet on further Federal Reserve monetary tightening to bring decades-high inflation under control. The Fed on Wednesday raised its benchmark overnight interest rate by 50 basis points, the biggest jump in 22 years, while Chair Jerome Powell added the bank was not considering a 75 basis-point move in the future. However, he assured Americans that the central bank will do what it takes to curb surging inflation, while acknowledging that this could risk economic pain. Meanwhile, the latest data showed the economy added 428K jobs in April, more than expectations for a 391K increase and the 12th straight month of job gains above 400K.
The precious metal has been on a downward trajectory since mid-April on expectations the US central bank will be forced to tighten monetary policy rapidly to combat consumer-price gains. The Bank of England warned of recession risks from double-digit inflation on Thursday, helping to boost the dollar. Higher bond yields typically weigh on non-interest bearing gold, while a stronger U.S. currency makes it relatively more expensive for some buyers.
Inflation is a double-edged sword for bullion
It can boost demand for the metal as a store of value, but also lead to tighter monetary policy that pushes up bond yields. If inflation shows more signs it is peaking and the Fed continues to signal that bigger hikes are off the table that should be positive for gold prices. The precious metal will still take cues from yields and the dollar leading up to this week’s inflation report, but after that release that correlation could change.
There’s concern that China’s outlook is deteriorating even further and that you might see less demand for some of those metals over the short term and that’s kind of driving the move lower for gold.
But capping bullion’s upside, benchmark U.S. Treasury yield strengthened, with stronger-than-expected U.S. jobs data perceived as building the case for bigger interest rate hikes. Gold traders basically saw the non-farm payroll report as another confirmation the Fed is going to remain on cruise control with delivering point rate increases over these next couple of policy meetings.
While gold is perceived as an inflation hedge, higher U.S. interest rates lift the opportunity cost of holding zero-yield bullion. Gold is considered a safe store of value during global uncertainties, such as the Ukraine war. MCX Gold June futures are likely to rebound to Rs. 52,000 per 10 gram this week.
Jigar Trivedi, Manager — Non-Agro Fundamental Research, Anand Rathi Shares & Stock Brokers