Home / News / India /  High inflation making everything costly, but why is gold getting cheaper?

Gold price in India stumbled on Tuesday tracking global prices as investors bet cautiously ahead of FOMC minutes. At MCX, gold futures erased the 51,000 mark while silver futures slipped by more than 1%. Interestingly, gold which is seen as safe haven against macro risks like high inflation, geopolitical tensions, recession, and global economic slowdown among others -- has failed to pick significant momentum. Why? The elephant in the room would be a strong dollar against which many currencies have weakened this year to the point they entered into a breakout of a series of fresh lows this year. Going forward, gold is likely to be range-bound as the dollar strengthening and rate hike scenario limits the rally of the yellow metal.

On Tuesday, the US dollar stayed firm to a little over the $113 level against a basket of currencies. Meanwhile, spot gold slipped to perform at $1,665.60 per ounce -- extending its losses from yesterday’s session when it fell by nearly 2% to below the crucial $1700/oz mark.

At MCX, at the time of writing, gold futures maturing December 5 dipped by 176 or 0.34% to trade at 50,847. While silver futures maturing December 5 dropped by 722 or 1.22% and are performing at 58,380.

On current gold performance, Ravindra Rao, CMT, EPAT, VP- Head Commodity Research at Kotak Securities said, "despite geopolitical tensions and global slowdown concerns, gold has not seen much of safe haven buying as investors are largely moving towards dollar index. Gold prices might remain under pressure today as dollar continues to gain momentum and US 10-year treasury yields rose to near 4% ahead of FOMC meeting minutes and speeches by several Fed members."

Meanwhile, on Tuesday, in major cities of India, 22-carat gold in 10 gram is cheaper by 700 to 46,900 compared to the previous day's print of 47,600. Also, the 100 gram in this carat is down by 7,000 to 4,69,000 from yesterday's figure of 4,76,000.

Whereas, the 24 carat gold in 10 gram has declined by 770 to 51,160 against the Monday's price level of 51,930. While 100 gram in 24 carat has tumbled by 7,700 to 5,11,600 on October 11 from yesterday's price of 5,19,300, as per GoodReturns data.

In its note, Emkay Wealth Management explains that historically, gold has been considered a hedge against inflation, a safe haven during times of uncertainty. But this time the precious metal is trading against the script.

Inflation has risen to levels not seen in the past few decades in the US, European countries, and also EMs like India. The central banks across the globe are hiking rates to rein in inflation, it added.

In India, the CPI inflation is at a multi-year high of 7% -- above RBI's upper tolerance limit for the eighth consecutive month. Inflationary pressure pushed RBI to hike the repo rate by 190 basis points so far in FY23 -- which led to a spike in bank deposits and lending rates making EMIs costlier. Currently, the repo rate is at 5.9%.

The government will announce CPI inflation data for September 2022 tomorrow.

Emkay's note said, "Despite the fact that we are witnessing high inflation, and economic uncertainties around the globe, gold has been largely trading range-bound, the trading range has been $1630 and $1740 for the past 1 month. It is currently trading around $1690-1700/oz. It is widely expected that in the near future gold may remain in narrow ranges."

Among the positive factors, Emkay points out that the only factor which gives some potential for strength to gold at this point in time is the occasional talk of gold as a hedge against inflation and uncertainties.

However, Emkay's note also said, that this property of gold as an asset class has been undermined to a large extent as evidenced by the fact that despite inflation having been very high in the US, Europe, and other territories, gold has not picked up.

Golds are under pressure due to the strengthening of the greenback and the aggressive approach of rate hikes from major central banks.

According to Emkay, the rate hike by the US Fed has led to the US Dollar strengthening against major currencies of the world. A firm dollar makes buying gold much more expensive thereby reducing the investment appetite.

It said, "The rise in the US interest rates and the likelihood of the hawkish stance of the Fed converting itself into rate hikes which may go well into the next year as well may keep gold prices at the lower end of the range. The current spell of gold weakness may continue till there is more concrete information on the state of the economy in the major economies, especially against the background of an aggressive central bank trade-off unfavourable to growth and promoting stability."


Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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