Gold prices rose to a fresh high of ₹65,298 per 10 grams on the MCX, marking a significant increase above ₹2,700 on the first Thursday of March last week. This unexpected trend in the value of precious metals is largely due to expectations that the US Federal Reserve (Fed) will cut interest rates in June.
Chairman Jerome Powell’s comments about possible rate cuts by the central bank in the coming months boosted market confidence, sending gold prices to a new high of $2,152 in international markets on Wednesday.
MCX Silver has declined since last Wednesday’s positive close. Around 9:30 am, it was trading at ₹74,015 per kg, down ₹123, or 0.17%. However, despite this short-term fall, the futures produced a significant gain of around ₹ 2,859 or 4.01% in March.
Rising gold prices are interpreted as a decline in the dollar index (DXY).
“Despite this unwinding of rate cut expectations, gold is showing relative resilience. Geopolitical tensions in the Middle East and global growth concerns are acting as tailwinds. While the US economy has managed to weather high borrowing costs and tight credit conditions thanks to US fiscal spending and consumers running down their savings, the support from these factors is expected to wane in 2024, dragging down growth. Rising credit card and auto delinquencies in the US signal weakness ahead. US inflation too is slowly but steadily progressing towards the Fed’s 2% target, which too should support rate cuts. Additionally, the rapidly increasing interest costs on the $34 trillion US national debt too is expected to weigh on policymakers’ decision making, prompting them to cut rates,” mentioned Chirag Mehta, Chief Investment Officer at Quantum AMC.
Roadmap ahead
Gold purchases by central banks in 2023 reached 1,037 tonnes, slightly below the record set in 2022, according to data from the World Gold Council.
“We believe this trend is likely to continue this year amid geopolitical tensions and the uncertainty on the macroeconomic front and act as a soft support for gold prices. As aggressive bets on Fed rate cuts unwind, global Gold ETFs have seen net outflows. Domestic gold ETFs on the other hand saw inflows of 657 crores in January probably driven by investors’ need to diversify their investments given that equity markets are gradually getting expensive,” Mehta added.
He further continued, “Gold prices could remain choppy in the months ahead as the market reacts to geopolitical developments and US monetary policy. Medium term outlook for the precious metal looks promising given the imminent turn in US interest rate cycle.”
