Is economy rising or receding?

There have been persistent pressures of inflation and the rates have been heading northward. These two factors prompted the yellow metal trade in a narrow range. Interestingly, what we have seen over the years is that normally gold prices tend to gain when inflation rates are high. However, this time round, gains for gold are restricted. And that's not without a reason. Gold has been trading in the range of $1810-1875 for the past one month. Mind you that inflation has become a key risk to growth for economies all over the world. Inflation has been hovering near multi-decade high in the US and in the UK. When it comes to India, the WPI data stood at a level highest seen since 1994, CPI inflation too has been above the 6 per cent mark for 5 consecutive months. Inflation concerns and global growth worries has also kept a floor to gold price. Gold is stuck in that range as market players await fresh triggers and this trend may continue in the near term however, tightening expectations may keep pressure on prices.

Three months ago, looking at the global market, reflecting a renewed rally in oil prices and the related fears of inflation, demand from safe haven seekers had picked up and pushed gold prices back above $1950 per ounce. In fact, both gold and oil had hit their war-time lows on the very same day, with prices briefly dipping below $100 per barrel and $1,900 per ounce, respectively. The increased co-movement between both commodities clearly suggested that inflation fears are the dominant driver of the gold market at that moment, luring safe-haven seekers back in. Holdings of physically backed gold products, the preferred gauge of safe-haven demand had recorded sizeable inflows of around 165 tonne since the start of the war, providing strong support to prices. The war in Ukraine otherwise continues to cause some wild price swings in commodity markets.

Analysts point out that the stubborn and sticky inflation has forced central banks across the globe to hike rates aggressively and unwind the easy monetary policy to reverse the excess liquidity in the system. The hike in the US interest rates by the FOMC has been much faster and higher than expected. The Fed has turned more aggressive based on persistently high inflation numbers. This has rendered strength to the US Dollar, and the currency yields are rising too with hike in policy rates.

These moves also reflect commitments on parts of various governments to contain inflation. If that is translated into action and if inflation edges lower in the months to come, gold may no longer be as sought after as it is normally. The key question remains if economic and financial market risks are on the rise or whether they are receding.