Gold Fundamental Forecast: Gold bulls scored another win last week, with gold prices rising nearly a full percentage point, pulling the yellow metal’s monthly gain performance into positive territory. Treasury yields pulled back across the curve into the weekend.
10-year Treasury Yield
The 10-year Treasury yield hit the highest level since January 2020 before bond buyers stepped back into the market. A deep pullback in high-beta equities occurred amid the Treasury rout, with stock traders likely trimming growth forecasts amid a tighter outlook on Fed policy brought on by persistent inflation.
Speaking of inflation, breakeven rates – the gap between nominal and inflation-indexed yields – fell, with the 2- and 5-year measures outpacing longer-term measures. A drop in breakeven rates is generally bearish for gold prices, given the yellow metal’s inflation-hedging appeal. The 2-year breakeven rate, which measures what markets see inflation at 2 years out, fell to around 2.35% from 2.47% through the week.
- Gold bulls scored a second weekly win despite Treasury yields briefly surging
- The Russia-Ukraine border situation is offering a geopolitical tailwind to bullion
- FOMC and PCE data are likely to inject volatility into markets – will it help XAU?
That suggests another factor was at play for encouraging the gold buying seen last week. The most likely factor is the increasingly tense situation on the Ukrainian border. Gold appeals to investors as a hedge against volatility. A Russian invasion of Ukraine would certainly qualify as an event worthy of inducing a potentially tremendous amount of uncertainty in markets – and traders hate uncertainty. The Russia-Ukraine situation’s influence on gold is simple: if tensions increase, gold likely gets a boost and vice versa.
Fed Rate Decision
However, several economic events this week are also front and center for bullion traders. The Federal Reserve’s first rate decision of the year is set to cross the wires on Wednesday. Traders will key in on Fed Chair Powell’s commentary given that a rate liftoff isn’t expected until March. Mr. Powell’s words over the balance sheet will be put under a microscope. The Fed Chief may also push back on the view that the central bank may increase rates four times this year – which is likely too aggressive in his view. A tempered rate hike outlook could offer a tailwind for gold prices.
US Inflation Data
That tailwind may receive a boost later this week when US inflation data receives an update via the personal consumption expenditures price index (PCE), set to cross the wires Thursday. The Fed has already capitulated that inflation is stickier than previously thought, so even a hotter-than-expected print may do little to firm up the hawkish stance among FOMC members. However, higher inflation could certainly support gold’s inflation-hedging appeal, especially if it follows a Fed event that trims rate hike expectations for this year.
In numismatics, intrinsic value, also known as melt value, is the value of the precious metal in a coin. For example, if gold trades in commercial markets at a price of US$ 1200 per fine troy ounce, then a coin minted from one troy ounce of fine gold would have an intrinsic value of US$ 1200.
The prices are near Rs 48,000 per 10 grams now. This is roughly 14 per cent lower from the all-time highs and 4 per cent lesser compared to January 2021 levels. Gold prices are likely to continue to rise in the medium-term amid inflation worries and uncertainty over the Omicron variant of coronavirus.
Gold has been an integral part of the portfolio and investors should see it as a hedge against inflation and other economic uncertainty. Investors should buy gold within the range of Rs 47,200-47,400, said Ramaswamy, adding that the prices were expected to hit Rs 55,500 by the end of this year
The conventional and the only best way to invest in gold was to buy physical gold, in the form of coins, bullions, or jewelry. But with time, more evolved forms of investment emerged like Gold ETFs (exchange-traded funds) and Gold Mutual Funds.