Is gold losing its mojo as the US dollar strengthens?
The price of gold (GC=F) fell on Monday after finishing under $2,000 (￡1,608) last week — for the first time since March — as the US dollar strengthened.
Spot gold was down 0.1% to $1,980.89 per ounce in early London trade, while US gold futures were flat at $1,990.20.
With gold also sensitive to rising interest rates, investors will be waiting for economic data from the US this week to work out what the Federal Reserve might do next.
Markets are pricing in an 86.3% chance of a 25-basis-point hike at the Fed’s next meeting in May, according to the CME FedWatch tool.
Impact of interest rates
Lower interest rates usually lead to an increase in demand for the precious metal, while a stronger US dollar tends to weigh on demand from foreign buyers.
Naeem Aslam, chief investment officer at Zaye Capital Markets, said: “In the commodity market, the precious metal has started to lose its mojo, and the main reason behind it is the strength in the dollar index.
Read more: FTSE and European stocks lower as Credit Suisse says ￡55bn left bank before rescue
“This week’s US GDP number could bring some buyers back into the market as traders would consider hedging their bets if the data shows more than expected weakness.
“The $2,000 price level continues to remain an important price point for traders and investors. This is because when the price trades above this level, it raises hopes for a new record high.
However, when the price trades below the price point, traders believe that the precious metal could experience a significant correction.”
Gold price rally
Gold, however, had been trading above the $2,000 price level before Friday, as slowdown worries mounted.
Despite the dip, gold bulls believe momentum will continue whilst fears and stability within the banking sector remain.
“The latest 'gold rush' coincides with investors wanting to better diversify their existing portfolios — whether that be cash, stocks or other digital currencies” Doug Turner at Kinesis Money, said.
“Gold has offered better protection in times of risk — such as a stock market crash, recession or black swan event — over cash and other assets in recorded economic history.”
India demand dampened
The recent high gold prices have dampened the outlook for demand in the world’s second-biggest consumer. India accounts for more than a fifth of world demand for jewellery, bars and coins.
Read more: First-time buyers face record house prices as sales recover
Chirag Sheth, principal consultant at Metals Focus Ltd, told Bloomberg that unless domestic prices drop by 5-10%, demand from April to June will be weak and overall sales this year will be flat to negative compared with 2022.
India is also bracing for a hotter summer than usual this year, which could also hurt demand.
Gold price outlook
Piero Cingari, an independent macro analyst, said precious metals will benefit from China’s reopening after it relaxed its COVID-19 restrictions, boosting activity and thus demand.
Looking ahead, Cingari said he’s of the view that the Fed will continue to hike the interest rate in May and keep high rates for a longer period of time than markets are currently factoring in, which may represent a headwind for further gold advances in the very near-term.
“If recessionary concerns in the United States become more widespread down the road, gold will be then perceived as the preferred asset to own in this phase, luring outflows from the stock market as corporate earnings fall and the Fed might be compelled to shift its policy. In such a scenario, we should expect gold to set new all-time highs,” he said.