By Navneet Damani
Gold prices rose nearly 7 per cent in May, marking the second green candle for the year so far. The yellow metal traded with high volatility in the range of $1,765 to $1,913, and marked the highest level in four and half months. Similarly, silver also traded with high volatility and ranged from $25.85 to $28.89. This move was aided amidst volatility in industrial metals, US Treasury yields and the US dollar.
Increased inflationary pressures as a result of unprecedented levels of stimulus injected into the global economy as well as expectations that interest rates will remain close to zero for a longer period provided support to the metal.
Fed officials have signaled that the factors driving the change in inflation are mostly transient, such as heavy fiscal stimulus and supply chain bottlenecks, and that is likely to fall back later in the year. The US Treasury Secretary had in the recent past sounded optimistic on US growth and downplayed inflation.
April’s weak employment data have lent further support to the viewpoint that the Fed will continue to remain accommodative for a longer period or, at least, until the labour market moves closer to its full potential. It is important to note that the US central bank has hinted repeatedly that substantial progress in the economy would be needed before officials consider any changes in the monetary policy.
The US inflation measure, which is closely watched by the Fed, posted its biggest YoY jump since the 1990s in April, exceeding expectations and fuelling concerns about price increases.
Inflationary expectations are rising and now the official data justifies that concern in the market. A surge in the PCE price index may raise a new alarm on an overheating US recovery amid bursts of demand as the pandemic recedes.
The US President has announced stimulus packages worth trillions of dollars with an objective to support the economy. The latest inflation data came as the White House released its full budget proposal in the recent past, reflecting its bet that it can work huge amounts of new spending into the economy without stoking a sustained jump in inflation.
The budget outlined more than $6 trillion in new spending to help strengthen the social safety net for low and middle-class households, and invest in infrastructure upgrades. The plans would lead the US’s debt-to-GDP ratio to rise to 117 per cent of output over the coming decade, which is an increasing concern for market participants.
India’s gold imports in April were above a 10-year monthly average. The ETF segment continues to witness buying and amidst the pandemic, many shops still remain shut on the domestic front, thereby impacting the retail demand. A slight shift in investor sentiment towards gold could also be visible in ETF holdings data.
After falling nearly 14 per cent in the first four months, assets of the world’s largest gold-backed exchange-traded fund, SPDR Gold Trust, rose by nearly 30 tonnes in May, justifying the move in metal prices. According to CFTC data, speculators raised their long positions in COMEX gold and silver in the previous month.
The prices may continue to move with a positive bias, supported by building inflationary pressures and expectations of a prolonged ultra-accommodative monetary policy from the US central bank.
Investors will continue to watch upcoming economic data closely to keep a track of the post-pandemic recovery. Any future comments on inflation and interest rates by Fed officials would also be in focus since gold is used as a hedge against higher inflation.
We continue to maintain our positive bias for an immediate upside towards $2,050, followed by $2,250. On the domestic front, one can target Rs 50,500, followed by Rs 56,500.
(Navneet Damani is VP-Commodities Research at MOFSL. Views are his own)