What does a 25 bps Fed rate hike mean for gold prices?

Gold is again the talk of the town as safe haven buying returns in this counter and the world is again talking about new highs possibility in gold. It already shot up nearly 8 per cent this year-to-date and the lovable metal has outperformed all other asset classes. 

In many countries; including India it already made a new record high (Rs 60,320) on MCX. It hit a record high further in the wake of a potential banking crisis, which saw several U.S. banks collapse amid a sharp rise in interest rates.  Dollar index, its arch rival slipped from the recent high of 105.88 to 102 levels. 

With a dovish statement by Fed on further interest rate hike, dollar index is most likely to see a further fall upto 100-99 levels.  In yesterday's meet Fed increased the key interest rate by 25 basis points but also gave indication of limited headroom to hike interest rates further. 

The prospect of a less hawkish Fed also boosted the outlook for non-yielding assets gold. Gold prices may remain in the higher territory on the dimmed economic outlook. The bank also trimmed its economic growth forecast for the year. If the banking crisis deepens further or more banks come into the list then definitely gold will be poised for new record highs in COMEX as well. 

However, at the same time, ETF buying is again on the lower side and it witnessed outflows in 2023 too so far. People are opting for more recycled gold with ongoing new record high prices in India. It is Central Banks, which are still aggressively buying gold. Gold's further move also depends upon the performance of other riskier assets viz equity market. The unpredictability of the current circumstances has also seen volatility tick higher in equities, which shows the buying, will come in gold in every dip. It is advisable to have at least 10-15 per cent of exposure in gold to provide insurance to your portfolio. It can eye $2100-2150 in COMEX and Rs 63,000 in MCX; considering the continuous depreciation in INR. If it falls then it will take support near $1860 and Rs 54,500 in MCX.

(Column by Vandana Bharti, AVP, Commodity Research, SMC Global Securities Ltd)