Gold price forecast explained: Gold price gets a boost from latest US inflation reading

The United States inflation data has shown a significant easing at 3 per cent in June, reaching its lowest level in over two years. As a result, gold prices have seen a swift response, as investors reassess their stance on this traditional inflation hedge. In the international market Gold prices hit nearly $1960 per ounce as the US dollar index dropped to 15-month low earlier this week due to easing US inflation.

The interesting interplay between inflation trends and gold prices is in the spotlight, highlighting the precious metal's role in a shifting economic landscape. However, with the Federal Reserve's forthcoming policy review more volatility is expected in gold prices in the short term. 

Impact of June's inflation rate on Gold prices

Inflation refers to the general increase in prices of goods and services over time, which the Federal Reserve evaluates by monitoring various price indexes. June's annual inflation rate reached the lowest level since March 2021, indicating the impact of the Federal Reserve's rate hikes. This marked the 12th consecutive month of easing inflation, relieving consumers grappling with persistently high prices.

Inflation erodes the purchasing power of a currency. Consequently, investors often look for inflation hedges, or investments that will hold or increase their value over time. Gold, a tangible asset, has been historically viewed as one of these hedges. When inflation rises, gold prices often increase as investors seek a safe haven to protect against decreased currency value.

The recent easing of inflation in June has led to changes in the investment landscape. The inflation data showed a significant drop from the previous year's peak to the lowest level. The core index, excluding energy and food costs, also saw a drop from May's level. These indicators point towards the success of the Federal Reserve's efforts to combat inflation.

Interestingly, a slower inflation rate does not always translate to a drop in gold prices. The gold market is affected by various factors such as real interest rates, the health of the global economy, geopolitical tensions, and market sentiment towards risk.

Given the recent slowdown in inflation, if the Federal Reserve delays further rate hikes, as suggested by some economists, it could support gold prices. The anticipations of the eventual conclusion of the central bank's rate increases have already led to higher stock and bond prices. If this outlook extends to the gold market, gold prices may also see a boost.

The relation between interest rate and gold price

Gold price and interest rates often share an inverse relationship. In simple terms, when interest rates rise, the price of gold typically falls, and vice versa. This relationship is primarily due to the opportunity cost of holding gold.

Gold is a non-yielding asset and it does not pay interest or dividends. Therefore, when interest rates rise, yield-bearing assets like bonds or savings accounts become more attractive to investors because they can earn a return on their investment. As a result, the demand for gold decreases leading to a decrease in its price.

On the other hand, when interest rates are low, yield-bearing assets are less attractive because they generate less return. This scenario makes gold more appealing to investors, which increases its demand and consequently its price.

Gold price: India perspective

To provide a comparative perspective, as of July 13, 2023, the price of 10 grams of 24K gold in India stands at around Rs 59,200. However, these figures are subject to daily market fluctuations and regional variations in India.

The Federal Reserve's upcoming meeting and expectations

The Federal Reserve has its next meeting scheduled for July 26, 2023. The wide expectation in the market is that the Federal Reserve will hike the interest rates by a quarter percentage point in response to the current inflation levels. This step would be aimed at controlling the inflation rate, which is still above the Federal Reserve's 2 per cent target.

Since the increase in the interest rate usually results in a dip in gold prices, investors may be cautious about investing in gold in the near term. However, any potential interest rate increase has likely been factored into the current gold prices as markets usually anticipate such moves.

The Outlook for Gold prices

Given the ongoing circumstances, in the short term, gold prices may face a slight downward pressure due to the expected increase in interest rates. However, gold often acts as a hedge against inflation. With inflation still higher than the Federal Reserve's target and uncertainty around the impact of future interest rate hikes, some investors might still turn to gold as a safe-haven asset. This dynamic could provide some support to the gold prices.

In the longer term, the trajectory of gold prices will likely depend on the course of inflation, the effectiveness of the Federal Reserve's policies in controlling inflation, and the overall economic recovery from the COVID-19 pandemic. Global geopolitical events and the performance of other asset classes will also influence the demand for gold and, hence, its price.

Expert outlook

Manoj Kumar Jain, Head-Commodity and Currency Research at Prithvi Finmart, shared his perspective on the immediate future of gold and silver prices. According to Jain, gold is expected to have support at $1950-1934 per troy ounce, while resistance is predicted at $1974-1988 per troy ounce. For silver, support is predicted at $24.00-23.66 per troy ounce, while resistance is expected to be at $24.55-24.80 per troy ounce.

"At the MCX, gold is having support at Rs 59,000-58,770 and resistance at Rs 59,400-59,660 while silver is having support at Rs 73,000-72,450 and resistance at Rs 73,950-74,600. We suggest buying gold on dips around Rs 59,000 with a stop loss of Rs 58,770 for the target of Rs 59,500 and also suggest buying silver around Rs 73,000 with a stop loss of Rs 72,400 for the target of Rs 74,600," Jain added.

Vandana Bharti of SMC Global added that despite the strong move there was a limited potential for upside. Bharti said that looking at overall trends, with the Dollar-strength Index slowly slipping around 100, buying should be done at Rs 59,200 with Rs 59,450 as a target price and a stop loss of Rs 59,075. "I am thinking that we can see Rs 200-250 increase in this commodity price before we meet resistance."

Bhargava Vaidya of BN Vaidya and Associates said that there are chances of price correction for gold in the long term will depend on the Federal Reserve's action but also the fast movement in gold prices will likely lead to some correction in the short term.