Gold prices may remain range-bound over the near to medium term unless we see some macroeconomic risks materialize nudging the US Federal Reserve to rethink policy normalization, says Chirag Mehta, senior fund manager-alternative investments, Quantum Mutual Fund.
Gold prices moved lower in September as the dollar strengthened on the back of a hawkish US Fed. Rising US Treasury bond yields put further downward pressure on gold.
Global gold prices extended losses on Wednesday, trading slightly above $1,750 per ounce. With the Indian rupee declining in the month, gold prices in India were around 0.4% lower at ₹46,600 per 10 gram.
According to experts, despite the optimism that the global economic recovery continues to progress, higher inflation and dissipating growth are still risks to the outlook.
After months of mixed cues, amid covid-19 resurgence, Fed Chair Jerome Powell sounded hawkish in the Federal Reserve's latest policy statement in September.
Powell signaled that the bar for tapering of the pandemic-related stimulus support for the American economy, which had been in place since the pandemic’s outbreak in March 2020, could be met as soon as the next meeting in November.
This wasn’t encouraging for gold which has thrived due to the globally easy monetary policies.
“The US bond yields and the dollar, on the other hand, are seen getting support from the move towards policy normalization. The only thing comforting gold investors now is that the tapering will be gradual," Mehta wrote in a note.
Moreover, with inflation currently elevated, that would mean real interest rates should stay low till the end of 2022, providing support to gold.
As per experts, the transition from one phase of the monetary policy cycle to the next by the Federal Reserve will be the main driver of global markets for a few months.
“Markets will settle down after they digest the changes and revalue assets accordingly. Gold’s bread and butter has been the ultra-accommodative monetary stance of the Fed and that is starting to normalize, which will cap its upside. But over the next couple of quarters, its utility as a portfolio risk diversifier and an asset that tends to keep up with inflation could come to the fore, limiting the downside," Mehta said.
