Growing tussle among central banks on inflation control hits Gold's prospects

International Gold has dipped below $1900/oz for the second consecutive week indicating the struggle to rekindle the upward momentum seen last month.

Gold went towards record high levels last month amid increased safe haven demand and rising inflation concerns on the back of a sharp rise in energy and commodity prices.

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While geopolitical tensions are far from over, gold is still struggling amid increasing efforts to get inflation under control.

Madhavi Mehta – Associate Vice President - Commodity Research Kotak Securities lays down future trajectory of Gold:

The US Fed raised interest rates last month for the first time since 2018 amid expectations that the economy is strong enough to cope with rising borrowing costs.

Comments from the US Fed officials also indicate that the central bank is willing to take an aggressive stance to get inflation under control.

Amid rising number of hawkish Fed officials, Kansas City Fed President Esther George warned that sharper and less politically palatable rate hikes may yet be needed to bring inflation under control, as reported by Reuters.

Central banks are altering possible impact of monetary tightening on economic growth against the need to get inflation under control.

With the growth outlook still stable despite risks, market players fear that central banks may work actively to get inflation under control.

Inflation continues to spiral out of control. Fed’s preferred inflation gauge, personal-consumption-expenditures price index, climbed 6.4% in February from a year ago, the fastest since 1982. Meanwhile, economic indicators remain mixed but reflect underlying strength.

Job openings in the US hovered near record highs in February while Q4 GDP growth estimate was revised down marginally from 7% to 6.9%.

Reflecting expectations of faster rate hikes, US 10-year bond yield has jumped to May 2019 high of near 2.55%.

Increasing efforts to bring crude oil and energy prices under control has also reduced gold’s appeal as an inflation hedge.

The US crude oil prices have slipped back below $100 per barrel level amid expectations of improved supply. European gas prices edged up this week but still remains well below the highs set last month.

Crude oil rallied sharply amid worries that Russia-Ukraine fighting and follow through sanctions may hamper supply significantly. Supply risks eased somewhat as the European Union avoided any restriction on Russian energy exports.

Adding to it, US and other consumers are increasing efforts to bring energy prices under control. In an unprecedented move, the US President has authorized the largest release ever from the US Strategic Petroleum Reserves, a release of 1 million barrels per day of crude for six months starting in May.

Adding to it, the International Energy Agency will hold an emergency meeting on Friday among consuming nations to discuss a new release of strategic reserves alongside a plan by the US to pump more supply (Reuters)

Gold remains stuck in a range near $1900/oz as market players shift focus from geopolitical risks to efforts to control inflation. 

This trend could continue in the near term as the Russia-Ukraine issue is far from over while inflation may not come under control soon.

However, with increasing efforts to control prices, gold could come under pressure. We may continue to look at economic numbers and central bank comments to gauge how quickly central banks may act.

The key event to look for in the near term is US non-farm payrolls data today followed by FOMC minutes next week.

(Disclaimer: The views/suggestions/advice expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)