Fed rate hikes and strong US greenback sent gold to multi-month lows

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Gold lost its glitter due to a strong US greenback and hints of more interest rate hikes from the US Federal Reserve that pushed investors away from the precious yellow metal.

The London spot gold corrected more than 18 percent from its recent high of $2070 which it hit in March, to a near one year low of $1685 an ounce this week.

Meanwhile, an all-time low Indian rupee and a hike in custom duty on gold have kept domestic prices somewhat in check from a steeper fall.

Gold is generally considered a safe investment during economic and political uncertainties. Last year, when the global economic situation became dire due to the Covid-19 pandemic, investors rushed into the safety of gold which saw prices rise to multi-year highs.

Similarly, in the early days of the Russia-Ukraine conflict, gold prices had reached a near-record level due to its safe haven appeal.

An increase in bank interest rates adversely affects gold as it is an interest-free investment.

During the Covid-19 era, many large economies had taken steps to strengthen their economy through various policy changes including cutting down interest rates. But now, they are on the path of hiking rates to contain higher inflation.

A swift rise in US greenback is also making the dollar-denominated gold cheaper. The US Dollar Index, which is used to measure the value of the US dollar against a basket of six foreign currencies, recently jumped to a twenty-year high.

The dollar’s rise was due to high inflation in the US which was at 40-year high and on surging bond yields.

In the domestic market, though prices corrected by almost 8 percent from its March highs, it managed to stay above Rs 50,000 per ten grams. An increase in custom duty and an all-time weak Indian Rupee offer support to prices.

The Government of India has increased the custom duty on gold from 7.5 percent to 12.5 percent from 1st July. This was due to higher imports, which widens our Current Account Deficit.

Indian rupee weakened to an all-time high of Rs 80 against the US dollar. Global factors such as the Russia-Ukraine conflict, soaring crude oil prices, and tightening of global financial conditions are putting pressure on the domestic currency.

However, since a large chunk of our gold demand are met through imports, a weak domestic currency increases the landed cost of the commodity causing a price rise.

While Indian gold prices generally depend on foreign benchmarks, domestic demand, fluctuations in the value of the Indian Rupee, and government policies can cause significant price variation. However, the fact remains that gold investment is very profitable on a long-term basis.

The price of gold, which was at the level of Rs 8000-9000 per ten grams during 2005-2006, has seen continuous progress in the subsequent years.

It went up to Rs 35000 per 10 grams in 2013 but slightly corrected and traded near Rs 27000 in the next few years.

Economic instability due to Covid and Russian-Ukrainian tensions have heated up the prices again, touching a high of Rs 55500 per 10 grams in the first half of the year.

Looking ahead, the domestic gold market is likely to remain strong. Although there may be significant price corrections in the short-term, gold is a good long-term investment.

However, investors are advised to buy and hold small amounts during price corrections. For that, investment opportunities in Central Government‘s Sovereign Gold Bond or Gold Exchange Traded Funds can be utilized to the maximum.

(The author is Head of Commodities at

)

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)

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