Gold prices have gained 11 per cent in the international markets and around 10 per cent back home between March 31 and June 7. Factors surrounding the rise in the yellow metal are a combination of increased inflationary pressures, weakness in the dollar index and the White House’s proposal of $6 trillion to ramp up spending on the infrastructure programme to boost the US economy.
Investors’ interest rise in the yellow metal
Employment prospects in the US have shown signs of improvement with the non-farm payroll data released on June 4, 2021. Nonfarm payrolls increased by 5,59,000 jobs in May 2021, after rising by 2,78,000 in April. That left employment at about 7.6 million jobs below its peak in February 2020.
Gold price performance from March 31 to June 7
Economists polled by Reuters had forecast 6,50,000 jobs to be created in May. About 9.3 million people were classified as unemployed last month. There are a record 8.1 million unfilled jobs.
Moreover, weakness in the dollar index and its inverse correlation with gold has had a fair share in rising prices of the yellow metal in the past two months. The dollar index – which gauges the greenback against a basket of six major currencies – stood at 90.021 as on June 8, not far from 89.533, a four-and-a-half-month low touched late last month. In dollar positions as reported by the CFTC, net dollar short positions have been falling over the past weeks in a sign of possible recovery and growth in the US economy.
Net short dollar positions in billion dollars
Inflation rising at a faster pace, What will Fed do?
US consumer prices increased by the most in nearly 12 years in April as booming demand amid a reopening economy pushed against supply constraints, which could add fuel to financial market fears of a lengthy period of higher inflation. The data suggests increasing periods of inflationary trends for the past six months.
Where is gold headed?
Real yields are nothing but the difference between the 10-year bond yield and inflation, and the curve is in a negative trajectory for most of the past months, which, in turn, has lead to rising investment in gold. Till the time the real yields are in negative territory, gold prices are projected to remain higher in the months ahead.
Although the inflationary trend seems higher, the unemployment situation in the US as per the recent non-farm payrolls data indicates that the slack in the labour market is going to continue for a longer period of time than markets expect. The Fed might be on the discussion table to wind up the bond buying purchase programme, but it will have to consider all the growth indicators before it actually moves towards winding up of QE.
Comex gold & real yields in US
We expect gold futures to move higher towards Rs 50,400/10 gms mark in a month. On Comex, gold rates are expected to move higher towards $1,960/oz in the same timeframe.
(Prathamesh Mallya is AVP-Research Non-Agri Commodities and Currencies at Angel Broking. Views are his own)