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Dollar strengthening, rate hike to limit rally in gold prices Weakness in gold to continue till clarity on global eco growth, rate hikes Gold remains lackluster despite high inflation & uncertainties worldwide

Mumbai : 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 hindering the rally in the precious metal prices despite the current setup.

Historically gold has been considered a hedge against inflation, a safe haven during times of uncertainty. But this time the precious metal is trading against the script. Inflation has risen to levels not seen in the past few decades in the US, European countries, and also EMs like India. The central banks across the globe are hiking rates to rein in inflation.

The current setup

Despite the fact that we are witnessing high inflation, and economic uncertainties around the globe, gold has been largely trading range-bound, the trading range has been $1630 and $1740 for the past 1 month. It is currently trading around $1690-1700/oz.  It is widely expected that in the near future gold may remain in narrow ranges.

Hedge against inflation?

The only factor which gives some potential for strength to gold at this point in time is the occasional talk of gold as a hedge against inflation and uncertainties. But this property of gold as an asset class has been undermined to a large extent as evidenced by the fact that despite inflation has been very high in the US, Europe, and other territories, gold has not picked up.

Why are gold prices under pressure?

The rate hike by the US Fed has led to the US Dollar strengthening against major currencies of the world. A firm dollar makes buying gold much more expensive thereby reducing the investment appetite.

The rise in the US interest rates and the likelihood of the hawkish stance of the Fed converting itself into rate hikes which may go well into the next year as well may keep gold prices at the lower end of the range. The current spell of gold weakness may continue till there is more concrete information on the state of the economy in the major economies, especially against the background of an aggressive central bank trade-off unfavourable to growth and promoting stability.

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