There are several factors which have contributed to gold’s movement in the past few years — pandemic being a major one. Now, the focus will be shifting towards geopolitics, inflationary concerns and central bank policies.
Just as the world was recuperating from the pandemic scars, market participants were hit by sudden updates regarding Russia invading Ukraine, which escalated quickly, supporting the metal prices. This climate of uncertainty is keeping the participants on edge. Multiple peace talks events between the two countries have not yielded any positive outcomes as yet, and Russia looks determined of making Ukraine surrender; the former has also given a warning to Finland and Sweden that if they join NATO even they could feel their wrath.
While market participants have shifted their focus to the Fed policy meeting and the hawkish stance, updates regarding the geopolitical tension and fear of rising Covid cases in China will remain an important factor to keep an eye on.
Inflationary concerns have remained a theme for the market since last year, and the geopolitical tensions have acted like gasoline to the already heated prices. Currently, US CPI is around 8.5% and unless and until there is news of war like situation settling down or easing in the supply chain disruptions, there will be worries regarding the same. Central banks have taken an aggressive stance w.r.t to the interest rates.
From a 25 bps rate hike in March 2022 meeting, market participants are now expecting at-least two 50 bps rate hikes this year. Fed has also announced its motive of balance sheet trimming by around $95 billion a month, to reduce their bloated $9 trillion balance sheet with an objective to calm the price pressures. This could weigh on the metal prices.
Amid higher prices from the start of 2022, market participants, especially on the domestic front, have been refraining from buying physical metal. On the other hand, agriculture also plays a significant role in gold demand, and Skymet has forecasted a normal monsoon for this year which could also provide some base for demand.
India’s gold demand declined 18% to 135.5 tonnes in the first three months of this year, mainly due to a sharp rise in prices, as per the WGC. In Q1 2022, the total gold recycled in the country surged 88% to 27.8 tonnes. Having reached a record high in Q4 2021, jewellery demand in India fell by 26% YoY in Q1 to 94 tonnes. However, demand could face headwinds should there be further increases or heightened volatility in the gold price, while broad-based inflation may also curb demand by squeezing disposable incomes.
Gold prices have historically inched higher during the times of Akshaya Tritiya as seen in the chart. Market participants have been discounting a 50 bps rate hike in May meet, hence, even with the updates regarding the Russia-Ukraine tensions, gold bulls are not finding enough strength.
Prices could form a broad range until and unless overall uncertainties are not settled, hence some recovery could be seen in the prices. Although, we believe these rallies on the higher side may not sustain and should be used to exit from the long positions. A cautious approach is advised until market participants get a sense of how the interest rate hike cycle and geo-political uncertainties will impact the market and the overall economic numbers.
However, we continue to maintain a positive bias in silver and suggest building positions on dips. Along with safe haven push, silver is also getting support as an industrial metal, creating a positive scenario for the white metal.
Spot Gold after touching almost the record highs is witnessing selling pressure on the higher range, holding strong at around $1900. Although keeping in mind Fed’s aggressive stance and its impact on inflation, we could see some weakness for the next few quarters. Looking ahead, gold on Comex could trade in a range of $1800 to $2050 for a 12-month perspective. On the domestic front, prices could trade in a broad range with critical support at Rs 50,000 followed by 48,000 and 46,500, while rallies on the upside towards Rs 55,000 would be opportunities to exit longs positions.
Our previous target for silver of Rs 70,500 followed by Rs 72,250 on the domestic front was met recently, but our bias still continues to favour the silver’s bullish narrative. We advise buying silver on major dips towards Rs 64000-65000, with upside potential towards Rs 80,000 followed by 88,000. Similarly, on the COMEX, silver prices are expected to trade higher towards $26.45 and $27.15 with strong support placed at $24.20 and $23.70. With buying on dips strategy, the rally might extend over $30 on Comex over the next 12 months.
(The author is Sr. Vice President – Commodity & Currency Research, Motilal Oswal Financial Services.)