How a strong dollar stole gold’s glitter

If central banks do not revise the tightening stance, gold may not make a strong comeback.
If central banks do not revise the tightening stance, gold may not make a strong comeback.


  • US Federal Reserve’s interest rate hiking spree has sent the dollar index to a multi-year high.

Raging inflation across the world, broader equity market turmoil, and a looming threat of a global recession should have been a perfect climate for gold to thrive. However, the traditional safe haven asset is not shining bright. International gold price is down 20% from its peak seen in March to around $1644/ounce. The reason is simple. The strengthening US dollar has stolen gold’s thunder. The spate of interest rate hikes by the US Federal Reserve has sent the dollar index to a multi-year high.

“Usually, when the global economy is in doldrums, the safe haven investment appeal of gold gains traction. It has played out in the past during the global financial crisis and recently during the Ukraine-Russia crisis," said Sriram Iyer, senior research analyst at Reliance Securities Ltd. However, this time around, massive interest rate hikes have made the US dollar a better bet than parking funds in gold.

Losing sheen
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Losing sheen

“Holding physical gold is chargeable. It is not free. In comparison, holding the US dollar (sitting on cash) seems to be a safer alternative in the current scenario," he said.

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The interest rate hiking cycle is likely to cap large and sustainable gains in gold, thus increasing the opportunity cost of investing in the yellow metal.

The sharper inverse correlation between the US dollar index and international gold prices lately tells us how the latter is fast losing favour among investors. Gold is often considered a hedge against inflation, but it is also a non-interest-bearing asset.

Against the backdrop of rising rates, investors are ditching gold for lucrative options such as bonds. The 10-year US treasury bonds are now offering an annual return of around 4%.

“The supremacy of the US dollar is wreaking havoc for many risky assets, including crude as well as gold," said Sugandha Sachdeva, vice-president of metals, energy, and currency research, Religare Broking Ltd.

“The US dollar, which is also seen as a safe haven bet, is surpassing gold in terms of investors’ preference. This is well reflected in the steep outflows from gold ETFs, which are likely to continue despite the risks of a recession," she said.

For the fourth month in a row, global gold ETFs witnessed outflows. In August, this number stood at $2.9 billion, showed World Gold Council (WGC) data. With that, two-thirds of the inflows seen through April are wiped out, WGC said.

International gold prices did get a brief breather on Wednesday after the Bank of England’s intervention in the bond market led to a pullback in the US dollar. Gold prices rose 2% on Wednesday.

“Gold was getting dangerously close to the $1,600 level as the dollar was surging to fresh records. However, that trade might have hit an exhaustion point," said Edward Moya, senior market analyst, the Americas, Oanda. In his note dated 28 September, Moya said that gold’s two-year low might be the bottom, if not it very close to it.

Meanwhile, in the Indian market, a weakening rupee has supported gold prices, which has led to some divergence between domestic and international gold prices. In the run-up to Diwali, given the Indian fetish for the yellow metal, buying on dips cannot be ruled out.

In local currency terms, on the MCX Futures, gold closed at 49,780 /10 grams on Thursday. Only if gold fails to hold the 48,800/10 grams mark on a closing basis will a correction towards 47,700/10 grams be on the cards, Sachdeva said.

Unless global central banks make a U-turn on their tightening stance, gold is unlikely to make an impressive comeback. As things stand, the likelihood of central banks reversing their approach to rate hikes appears slim.

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