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Despite continued inflation and unabated geopolitical tension, gold is gradually becoming less and less attractive as financial investors have begun to retreat from the yellow metal, as a result of which it is facing its third weekly loss.
Gold is under pressure, dropping well below the psychological $1,900 an ounce, weighed down by the firm US dollar and rising bond yields.
On Monday, it was trading at $1,870/oz. Yields on 10-year US Treasuries have increased to 3.15 per cent, thereby raising real interest rates to nearly 0.3 per cent. This makes gold less attractive as an alternative investment.
Moreover, over the past two weeks, ETF investors have been withdrawing from gold. As per the latest available US market regulator CFTC data, speculative financial investors have cut their net long positions for three weeks in a row, including by as much as 16 per cent last week, disclosing a 3-month low.
It is also believed that less committed investors are exiting gold to pay for an equity margin call, etc.
Demand destruction
From the demand side, too, there is little cheer. Chinese demand was down 10 per cent in Q1 this year to 260 tonnes. India, too is facing demand destruction because of high prices and general erosion of purchasing power due to inflation. If anything, high prices are encouraging scrap sales that add to the supplies in an enervated demand scenario.
No wonder that gold has lost as much as $100/oz since mid-April. The metal’s headwinds are gathering pace with the announcement of QT (quantitative tightening) and forward guidance on interest rate hikes.
Persisting inflation in major economies such as the US (8.5 per cent at a 40-year high) and the continuing Russia-Ukraine conflict have combined to provide a supportive floor so far. However, the geopolitical conflict cannot go on forever. Sooner rather than later, it has to end, one way or the other.
In the event, energy prices also will face correction, delivering some relief from high inflation. This will reduce gold’s appeal as a safe haven asset and hedge against inflation. The metal’s fortune will recede as the environment turns less supportive.
As the stock market improves, there will be a further exit from less-committed financial investors in gold. Moreover, investment demand will moderate with a price correction.
Indian scenario
From an Indian perspective, it is clear that our domestic prices reflect dollar price plus taxes plus logistics cost, in rupee terms. However, signs of the rupee weakening towards 79-80 to a dollar are visible. A weaker rupee will partially negate the benefit of a fall in dollar rates, and Indian consumers will be denied the benefit of a fall in the gold price in dollars.
The psychology of Indian market participants is that they are comfortable playing in a rising market. But they ought to know that a falling market offers greater rewards if played well. Indian investors have to learn to play the bear market. Of course, it calls for knowledge – deep insights into the market drivers and dynamics.
(A part of the article is excerpted from the author’s speech at the IMC-MCX Gold market fundamental forum held recently. The author is a policy commentator and commodities market specialist. Views are personal)
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