Gold Market Analysis: Key Parameters Shaping the Future of Gold Prices

Gold analyst Sanjiv Arole explores in detail factors such as US inflation, Federal Reserve policies, the US dollar, and geopolitical pressures at play, aiming to uncover their impact on the gold price and what lies ahead for this enigmatic commodity.

Astrologers use mathematics and other tools to calculate the course of various astronomical bodies and determine how these movements will affect anyone’s future. By contrast, a horoscope is a diagram, chart, or graphical representation of the heavens. However, whether astrology is an exact science is not the topic under discussion here.

The astrologers in the gold market (as well as other precious metals) are analysts, experts, observers, pundits, chartists, investors, traders and even gold bugs who use various tools to predict the price of gold and thereby form their strategy according to their needs. Most of them have underlined several key parameters that could impact the gold price in the current year. By consensus, US inflation, Fed policy on interest rates, the US dollar and geopolitical pressures are the trigger points for the gold price.

After a couple of 25 basis points rate hike in the first couple of meetings, the US Fed has put a pause on interest rate hikes, the US dollar is struggling to hold on to its own, US inflation is still much higher than the long term average of 3.28%. The recent banking crisis triggered a scare of a collapse in the banking system comparable with the 2008 Lehman Brothers collapse that had triggered a recession later.

Apart from that, a host of other issues including the continuation of the Ukraine war combined to propel gold past the $2,000 per ounce mark on 4th April, 2023 and reached a high of $2,044.70 per ounce (a sharp rise of over 11% from the beginning of the year) on 4th May, 2023 (London pm fix). However, in spite of repeatedly crossing the $2,000 per ounce mark in April-May, gold failed to really take off as anticipated by many. It seemed to slip back towards $1,950 per ounce or even below.

For, all the parameters seemed to be in favour of gold. So, why has gold stalled? What’s in store for the yellow metal during the remainder of the year? Will gold flatter to deceive once again? Or will gold gather itself and smash through $2,100 per ounce and soar to greater highs?

A look at all the parameters that could impact the gold price in detail could perhaps provide answers to some of the questions. The various parameters are:

US inflation: Just a few years ago US inflation was at a 40-year peak of 9.1% in June 2022. That in turn hardened the Fed policy on steep interest rate hikes over the remainder of 2022. Thereby, raising fears of a recession and mainly gave a boost to the gold price. Currently, the US inflation is at 4.93% compared to 4.98% a month ago and 8.26% last year. However, this is still higher than the long-term average of 3.28% and the target of 2%. The pause in interest rate hikes by the US Fed could mean a rise in inflation and that could still be beneficial for gold.

US Fed policy: The pandemic saw billions of dollars being pumped into the system to be distributed to the US populace. This in turn stoked the already high inflation to 40-year high levels of 9.1% in early 2022. The Fed under its chief, Jerome Powell, then embarked on an ultra-aggressive policy to tame inflation. Towards that goal, the Fed hiked interest rates throughout 2022 as well as 2023 till its 3rd May Federal Open Market Committee (FOMC) meeting. The sharp rise in interest rates put a dampener on the gold price during most of 2022. However, the spectre of looming recession did cause the Fed to slow down a tad in December 2022 and in 2023 with two hikes of only 25 basis points each. In fact, the Fed increased interest rates by 500 basis points in the period between March 2022 and May 2023.

The sudden collapse of three banks in the US and the garage sale of Credit Suisse to UBS in March raised fears of a return to the 2008 Lehman Brothers type induced global meltdown. Then, gold had soared towards its all-time high levels of $1926 per ounce in September 2011. That fear also forced the Fed to push the pause button on its rate hike policy. It will be interesting to watch how the Fed policy pans out during the remainder of the year given the market conditions, with higher inflation, recession and the real threat of the banking crisis escalating further. Only if the authorities are able to avert a full-blown banking crisis will the Fed be able to embark on its mission to tame inflation. Gold would be waiting in the wings to pounce at any given opportunity.

The US banking crisis: Within a space of a few weeks (nay days) in March 2023, three US banks failed. It all began with SVB, followed by Signature bank and First Republic Bank. By the end of the month Credit Suisse was spectacularly plucked away by rival UBS in Europe. All these events caused the global markets to crash and gold crossed $2,000 per ounce on 4th April, 2023. It even attempted to cross its own all-time high levels by scaling $2044 per ounce, but was much closer to $2,067 per ounce (intra-day). Although, there is a lull and markets seem to have recovered, the banking crisis is said to be far from over. Gold, pushed down below $2,000 per ounce levels to the mid-1950s, is waiting in the wings to bounce back.

The omnipresent Ukraine war: The Ukraine war is now in its 15th month with no end in sight in the near future. Although none of the worst-case scenarios have taken place – European countries have not buckled under the weight of high fuel prices and short supply, nor has the Russian economy collapsed in spite of the severe sanctions imposed by the US-led NATO and its allies. On the contrary, the Russian economy has done quite well and it continues to defy and circumvent the sanctions. With the capital cities of both the warring nations under fire, the war seems far from nearing its end.

The conflict has also pushed the world to trade in currencies other than the USD as the US tends to use the position of the USD as the base currency to impose sanctions on other countries. There seems a definite move towards de-dollarisation. Elsewhere, geopolitical tensions are seen with North Korea testing its spy satellite and nuclear missiles. Taiwan continues in the news with US and China testing each other’s resolve on that matter. The oil-rich Middle East and the Gulf continue to simmer just below the surface. Gold lies in wait.

Central bank purchases: After a record breaking 1,078 tonnes in 2022, central banks purchased 228 tonnes in Q1 of 2023, although lower than the last two quarters, it was 34% higher than Q1 2022 and highest since 2013 for Q1. The four major central banks that purchased gold were: Singapore, China, Turkey and India. Gold continues to be a favourite among central banks and that gives a huge boost to the demand side of the equation. It means that most central banks are positive about gold and their appetite remains unabated.

ETFs: The banking crisis saw an inflow of 32 tonnes ($1.9 billion) in the month of March 2023. However, that was not able overturn the outflows in January and February 2023, the net outflow being $1.5 billion. Overall, global ETFs total assets rose by 10% to $220 billion by the end of March. Gold holdings increased by 32 tonnes to 3,444 tonnes. The trend in coming months is likely to be determined by several factors impacting the gold price.

US default: Janet Yellen, the US Treasury Secretary, warned that a default by the US on its debt commitments could push not only the US, but the world into recession and cause a major economic upheaval. US has an over $31 trillion debt (over $94,000 per person). Ultimately, the US Congress passed the enhanced ceiling before the 1st June, 2023 deadline. However, the drama on the day the US Congress passed it saw gold scale $1,981 per ounce and end with a low of $1,941.60 per ounce.

Short selling by JP Morgan: The markets are abuzz with an open secret. It is being said that J.P. Morgan holds massive gold short positions that could be larger than the bank’s total assets. That is the reason, many aver, that any move by gold above $2,000 per ounce is being scuttled by short sellers. Likewise, for silver the threshold limit is $30 per ounce. This is a potential time bomb that could take the bank down should it be forced to deliver on its short positions. Therefore, if gold were to break free and soar by, say, a $1,000 per ounce, all hell would break loose. Probably, that is the reason that cart is running the horse and J.P. Morgan gets the funds to bankroll the short positions.

Global economic trends: The global real GDP is forecasted grow by 2.3% in 2023 against 3.3% in 2022. Most of the weakness is expected from Europe, Latin America and the US. This and the continuous flow of US economic data on unemployment, jobless claims, farm incomes, consumption levels, etc. could swing gold one way or the other as per market perception of the data flows.

De-dollarisation: The Ukraine war has brought de-dollarisation in focus. For quite some time many countries believed that the US had weaponised the greenback to push through US foreign policy priorities and punish those countries who oppose them. The war has seen Russia sell its oil to all and sundry by bypassing the USD. Before that, China and Saudi made an agreement last year whereby China would partly pay in Chinese Yuan for its fuel requirements. A Bloomberg newsletter recently pointed out that Brazil and China had recently struck a deal to settle trade in their local currencies seeking to bypass the greenback. India and Malaysia signed an accord to ramp up usage of the rupee in cross-border business. Even US ally France is starting to complete transactions in the Yuan. Russia too has billions of rupees in Indian banks against payments for Russian oil to India. Whether all of the above makes any significant dent to the USD’s position as the pre-eminent currency is too early to say. But, the wheels have been set into motion. This complex situation could benefit gold in the long run. For, a stronger dollar as the reserve currency is often detrimental to the gold price.

Finally, gold’s price volatility in the year so far even in rupee terms has seen demand for gold in a key consumption market like India take a beating. The much-hyped Akshay Tritiya sales were more or less way below expectations as both gold and silver soared above Rs.63,000 per 10 gms and Rs.76,000-77,000 per kg, respectively in the local markets. The gold market situation is in a state of flux globally, including India.

Aristotle’s idiom “One swallow does not make a summer (spring)” is used to say that because one good thing has happened, it is not, therefore, certain that a situation is going to improve. If one were to juxtapose the same with the current scenario with gold, then, gold has seen more than just a couple of such golden swallows in the current year. If $2,000 per ounce is the swallow then, gold has crossed that mark more than just a couple of times since April, 2023. In fact, the yellow metal has threatened to cross its all-time high levels of $2,067 per ounce several times and usher a golden year for gold with the predicted higher levels of $2,500-3,000 per ounce. Will that ultimately happen this year? Wait & watch with fingers crossed!!

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