By: K Raveendran
The rampaging dollar has caused a bloodbath in the currency markets, with all other major currencies falling to multi-decade lows. The rupee has not done any better. The Indian currency touched historical lows, crossing 81 to the dollar, the lowest it has touched for all times. The dollar rampage, a by-product of US Fed tightening in the face of red-hot inflation, has not spared no investment activity. Markets have suddenly become more sensitive to monetary policy decisions. Gold, which is considered a safe haven against inflation, geopolitical risks and other uncertainties, has also been hit by the headwinds.
Gold ended August 2 percent down, registering the fifth consecutive monthly drops. So far this year, gold is down 5 percent in dollar terms. Looking ahead, the precious metal is expected to remain under pressure, given that the central banks are aggressively hiking rates. It is a different matter that under similar circumstances, gold has historically outperformed all other products. Gold enthusiasts, however, argue that the decline in gold prices would have been much steeper but for the metal’s capacity to fight the odds. They feel the headwinds will start subsiding in the months ahead, leading to demand pick-up.
Despite gold’s weakness in recent times, gold bulls assert that the metal has still outperformed most other asset classes this year so far, although it may not be very evident. Analysts believe trading volumes will pick up further this month, as seasonal demand increases in view of the festive season.
According to World Gold Council, Indian retail gold demand bounced back in August following a seasonally quiet June and July. Jewellery demand picked up ahead of the wedding season in South and North India. A mid-month local gold price correction also acted as a catalyst supporting both wedding and regular purchases. Bar and coin demand witnessed decent activity, largely thanks to the lower price in the latter part of the month. With a recovery in retail activity, wholesale demand improved and the discount in the local market narrowed to $5-6 per ounze by the third week of August, compared to a discount of $10-12 per ounze at the end of July.
Swiss gold exports jumped to 202 tonnes in July, more than double of June’s 97 tonnes and the highest monthly total since December 2016 when 297 tonnes were exported. A 147 percent month to month increase in exports to China was the key driver. A significant rise was also seen in most major markets, including India, Germany, Thailand, UK and Turkey. On a year-to-date basis, Swiss gold exports amounted to 930 tonnes, the highest since 2018.
Central banks continued to buy, with the July purchases totalling 37 tonnes, of which 13 tonnes were on account of the Reserve Bank of India. Qatar, with 15 tonnes, was the month’s biggest buyer, taking its total gold reserves to 72 tonnes, which is the country’s highest so far. According to the gold council’s research, historical data shows that gold has offered attractive returns during India’s monetary-tightening cycles. In five rate-hiking cycles since 2004 gold in Indian rupees averaged an annualised return of 19.5 percent, outperforming other major assets.
India’s headline inflation, denoted by the consumer price index has been on an upward trajectory since October 2021. With rising commodity prices and supply chain disruptions, retail inflation has followed suit, remaining elevated at 7.01 percent in June 2022, with WPI inflation touching a high of 15.18 percent in the same month. The retail inflation, which was 6.71 percent in July, inched up to 7 percent in August, mainly due to higher food prices.
Gold bulls believe that as recessionary and geopolitical risks increase, investors may shift to more defensive strategies, looking for high quality liquid assets such as gold to reduce portfolio losses. According to the gold council, investors appear reluctant to accept that the US rate-hike cycle will extend beyond year end and points out that markets are pricing in expectations for the Fed to reverse course in late second quarter of 2023. This could reflect a belief that either inflation will come down quickly or a deep recession will force a policy rethink. The apparent divergence between market expectations and Fed rhetoric on the path of policy rates highlights uncertainty over the outlook, which may lead to continued volatility across financial markets and end up in favour of gold. (IPA Service)