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By Jigar Trivedi

Gold fell to the lowest since April 2020 amid expectations of more aggressive interest-rate hikes by the Federal Reserve despite a fresh round of mixed US data. MCX Gold October along with Comex gold has given clear break down amid aggressive Fed hike hopes after US inflation came in at 8.3% in August against forecast of 8.1%. Odds are now favouring 75 basis point hikes at each of the last two Fed meetings in 2022. Some are calling for a 100 bps increase which is partly reflected in the gold market, adding that a 75 bps hike could thus come as a positive surprise for the gold market.

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Gold also lost its shine as a safer-haven asset in times of heightened economic uncertainties, with the World Bank and IMF slashing growth forecasts for key economies, while major US companies issued weak guidance on dire economic outlooks. While gold is considered a hedge against inflation and economic uncertainties, higher interest rates raise the opportunity cost of holding non-yielding bullion, denting its appeal.

US bond yields extend rise

The yield on the 10-year US Treasury noted rose above 3.45%, approaching the over 10-year peak of 3.5% hit in June as rising concerns that inflation is becoming entrenched deepened expectations that the Federal Reserve will further accelerate the pace of its monetary tightening. After this week’s CPI report surprised to the upside, the latest data showed that retail sales unexpectedly pick up and weekly unemployment claims fell to their lowest since May, ramping up bets that the Fed could raise interest rates by 100bps next week. Increasingly hawkish expectations raised Treasury yields across the board, with the yield on the policy-sensitive 2-year note surging to a 15-year high of 3.8990%, inverting the 2-to-30 year yield curve to its steepest this century.

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US inflation rate cools less than expected

The annual inflation rate in the US eased for a second straight month to 8.3% in August of 2022, the lowest in 4 months, from 8.5% in July but above market forecasts of 8.1%. The energy index increased 23.8%, below 32.9% in July. Smaller increases were reported for gasoline costs and fuel oil while inflation sped up for natural gas and electricity. On the other hand, inflation rose for food (11.4%, the most since 1979), shelter (6.2%, the most since 1984), and used cars and trucks (7.8%). Compared to the previous month, consumer prices were up 0.1%, following a flat reading in July and compared to forecasts of a 0.1% drop. Meanwhile, core CPI, which excludes volatile energy and food prices, increased 6.3% on a year, the most since March, and up markedly from the 5.9% hit in both June and July.

Outlook

Monday is a holiday in Japan and the UK. The major focus will shift to Wednesday the 21st September, when the Fed monetary policy outcome is scheduled. Due to Queen Elizabeth II’s demise, BoE postponed its policy meeting from last week to 22nd September Thursday. Amid two major monetary policies scheduled in the week, we expect the yellow metal to stay volatile. Having said that, $1,680 an ounce is a major level and if the market can climb above it, there is a possibility of $1,710 an ounce on the higher side however, in the reverse case, $1620 an ounce is a floor as of now. MCX Gold October may drop to Rs. 48,400 per 10 gram in case of a further drop. We recommend waiting for a bounce until Rs. 50,200 per 10 gram and then considering shorting the yellow metal.

(Jigar Trivedi, Senior Analyst – Currency & Commodity, Reliance Securities. Views expressed are the author’s own.)