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Mumbai: Gold prices have seen support due to the current economic data in the US. The yellow metal now has support levels at 1970 and 1990 as the US Dollar softened post the latest job data. The latest data set has led to a belief that the US Fed will take a pause and hold interest rates at current levels. The treasury yields too have softened from the high levels seen in the month of March.

Fed action key to gold price movement

While the Fed Chairman indirectly hinted at the possibility of a pause, the other 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%-5.25%. The improving labor market and the unemployment levels in the US indicate the underlining strength of the economy. Going forward the action from the US Fed will provide cue and the likely movement of gold prices.

Inflation remains key to US Fed’s action

Inflationary pressures may not be completely over for the Fed. While the larger consensus is the central bank may pause in its June meeting. Any rise in retail prices may force the central bank to tighten rates. Any hike in rates may lead to softness in gold prices.

Concerns around global economic slowdown will support gold prices

What had initially given support to gold prices was the uncertainties surrounding the growth prospects of the global economy. The tight money policies pursued by the central banks are expected to pull down the rate of economic growth in most economies. A slowdown enveloping the larger economies could put gold in the spotlight as safe haven and also as something that retains value even in uncertain times.

The way forward

While gold is expected to hold well at the support levels, much would depend on the fortunes of the US economy. 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 two FOMC meetings. 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.