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Emkay Wealth Management, the wealth management and advisory arm of Emkay Global Financial Services have released a note on gold, price outlook, and the reason for the rally in the precious metal prices given the current setup. The note states, the development in the US economy as the key factor providing further cues for the yellow metal. Currently, $1930 and $1960 are the support level and on the upper end there is a high probability of gold prices testing the $2020 level and breaking through it.

Current support levels for Gold

Gold prices have come down to support levels at 1930 and 1960 as the US Dollar eased a little due to the latest rate hike by the Fed. The gold prices are rallying on the positive commentary by the Fed of little risk of recession and a possible rate cut from next year. The Fed may hike rates one more time in CY23 depending upon the economic data.

The Inflation worry

Gold prices came down to US$ 1911 as fresh data indicated that the U.S. Consumer Confidence in June rose to the highest level in the last 18 months. In addition to this, the single-family home sales rose by 12.20% in May, much higher than expected by the market. Fed officials, quite a number of them, sounded like there is enough room for the Fed Funds Rate to rise even beyond the 6% level, from the current range of 5.25-5.5%. The robust labor market and the low unemployment levels in the US are reflective of a relatively strong economy, and it may be interpreted to mean that the inflationary pressures are far from conquered, and could raise its hood again if left untreated. This has resulted in a fall in the gold prices.

What had initially given support to gold prices was the uncertainties surrounding the growth prospects of the global economy. The tight money polices pursued by the central banks are expected to pull down the rate of economic growth in most economies, and with a slowdown enveloping the larger economies gold attains the spotlight as safe haven and also as something that retains value even in uncertain times. While gold is expected to hold well at the support levels, much would depend on the fortunes of the US economy.

Rate hike and recession

The first point is that the recession may be a touch and go, and if that is going to be the actual case, then gold will be able to make only limited gains. The recent data from the US is still mixed. Second, there is still no final statement from the Fed on the trajectory of policy rates. It is still to evolve further over the next FOMC meeting. Third, the buoyancy created by money flowing into ETFs is missing at present. And finally, there will be limited diversification in the existing investment portfolios given the assessment that conditions will be the same across territories and a diversification away from the US or developed markets is not feasible at this juncture. Any further dips in gold can be opportunities to buy into.

Institutional & Central Bank Interest in 2022

The institutional and central bank interest in gold is a factor that has lent strength to the metal in the last two years. In 2022, central banks bought a record 1,136 tons of gold, valued at US$70 billion. This interest in gold is likely to be sustained during the course of this year too.

Gold ETFs inflows

Gold ETFs have witnessed inflows in the last three months, that is March-May, 2023. The higher probability of rise in gold prices led to the inflows. More than price appreciation, there were some other factors too which helped the yellow metal, like the US banking, the protracted debt ceiling negotiations in the US etc. in the last few months. At present even the developments in Russia is viewed with interest for its consequences for safe haven assets like gold. The total gold holdings of all ETFs put together has touched 3,478 tons by end-May,2023, which is 19 tons higher MoM.

The Currency Factor

The currency markets recently witnessed another occasion of surge in the US Dollar. While there is some sluggishness in growth which has already set in, the general belief is that the US may avoid a full-fledged recession. The strength of the US Dollar would also depend on the direction of the monetary policy in other territories especially Europe. It is too early for the ECB or the BOE to move on to a pause in the rate hikes as inflation is still elevated in Europe, with the BOE hiking the rates once again in the recent past. These incongruities may decide inter currency alignments as data flows gather momentum in the coming weeks. This takes us to the Dollar Index.

The Dollar Index

Gold prices, like other commodity prices, tend to move up as the US Dollar depreciates as these commodities are quoted in US Dollars. Therefore, in times of dollar depreciation, the probability of gold prices rising is quite high. Technically, any rise in the index is capped at 103.90 and 106.30 for the time being. Any break of the index above these levels would require triggers like geo- political issues flaring up too soon. The support for gold prices is at 1730,1680, and 1630, in that order.

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