Noisy Challenges ahead for Gold

Many believe that markets have been behaving very strange lately. But frankly speaking, I did not find this new. This was bound to happen amid rising US dollar and US bond yields. Needless to say recession is prevailing in most EU economies and if DOW has tumbled-3500 (-12%) in past 6 weeks, it got discounted on day to day basis after data releases.

The Pound’s crash is showing markets have a lack of confidence in the UK and that its financial strength is under siege. The UK is now in the midst of a currency crisis. British government bond prices collapsed on Monday, pushing yields to their highest in over a decade with 2-year Gilt yields jumping by more than 50 basis points for a 2nd session running to 4.53%, the highest since September 2008.

That means UK bond prices are on track for their biggest slump of any calendar month since at least 1957, according to a Reuters analysis of Refinitiv and Bank of England data.

European bond prices also slid on Monday, led lower by Italian sovereign debt, after victory for a coalition led by the Brothers of Italy in the country’s snap election, forced by parties across spectrum pulling their support for former European Central Bank chief Mario Draghi as caretaker premier. There’s a fear that the new actions will add uncertainty to the economy.

The key question will be what does this mean for ultimately weakening the European economy, which is an important consideration for how the U.S. economy is going to perform
The USD surge along with bond yields are at new decade high, making the recession woes more amplified and asset grinding.

Amidst all this gold too was not spared. Gold prices rose on Tuesday as the dollar slipped, but the metal languished near a 2-1/2-year low on prospects of further rate hikes by the U.S. Federal Reserve to tame soaring inflation.
As long the Dollar continues its relentless rise and until the market reaches peak hawkishness and yields start to top out, gold will struggle to act as a defence against stagflation.

As fears of a widespread U.S. recession mount, the global marketplace started Monday in choppy waters. The dollar’s continued strength has been a headache for gold bugs, as the Yuan hit 2008 lows and the British pound sterling was hit by the U.K.’s plan to sell more government bonds in a bid to better their economic growth. The dollar’s advance stalled on Tuesday, providing relief for the non-interest bearing metal. While gold is seen as a traditional haven in times of economic distress, fears of a global recession stoked by central banks’ monetary tightening has instead triggered big gains in the greenback.

Global stock markets fell for the 15th session in the last 20, while government bond prices also fell again together with most industrial and energy commodities in Dollar terms.

The focus is still on dollar strength, and it could continue to weigh on the precious metal as more rate hikes to tame inflation will dent gold’s safe-haven status.

Gold prices started the week on the defensive amidst shrinking open interest and volume, hinting at the likeliness that further losses look not favoured and therefore a potential rebound could be in the offing. In the meantime, decent contention has so far emerged around the $1,620 level per ounce troy.

The prevailing upside risk to inflation and, hence, monetary policy tightening still remains a key obstacle limiting gold’s upside.
Fed officials on Monday sloughed off rising volatility in global markets and said their priority remained controlling inflation.
Gold prices have declined more than 20% since rising above the key $2,000 level in March, as rapid U.S. rate hikes made the non-yielding bullion less attractive and also pushed the dollar to multi-year highs.

But there are some who believe otherwise. Even though gold prices have fallen more than $400 since the precious metal broke through a critical $2,000 level in March, some experts are seeing positive signs amid the noisy challenges.

The gold loyalists believe that the yellow metal could jump in value if the Federal Reserve’s campaign of interest-rate hikes fails to crush inflation. Owing to the rate hikes, investors could lose faith in the central bank and their long-term inflation expectations would rise, boosting demand for the metal as a hedge.

This week, the market may face fresh volatility from the release of US inflation data and public speaking engagements by Federal Reserve officials including Vice Chair Lael Brainard and New York Fed President John Williams.

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