Will gold regain its sheen after the US Fed's monetary policy this week?

Gold prices have taken a big hit in the last two months. Ever since the equity markets have taken-off their flight to new historic levels, the safen-heaven bullion has lost its sheen from the all-time record high levels of Rs 62,000 and falling below Rs 59,000 in June. However, it has posted a mild recovery to regain Rs 59,000-levels in July so far.

More often than not, gold has an inverse relationship with interest rates. The yellow metal is considered to be a hedge against inflation. Market analysts have divided opinion about the Fed's policy this time. A few believe that current prices discount a 25 basis points (bps) hike, while others see that unchanged interest rate may lead to rise in the bullion prices.

Ravindra V Rao, CMT, and VP-Head Commodity Research at Kotak Securities said that a hike of 25 basis points in the upcoming FOMC meet is already priced-in by the gold markets. "There is a miniscule possibility of the status quo which, if anything happens, might be very bullish for gold," he said.

With markets expecting a 25-bps hike in policy rates, gold prices are unlikely to show any significant movement if the policy decision plays out as anticipated, said Manish Chowdhury, Head of Research at StoxBox. "The reaction to gold will be dependent on any changes to the inflation and growth narrative and how strongly the Fed maintains its monetary policy tightening bias.

However, a few experts are going against the tide. "As US CPI data has cooled off to 3 per cent last month, this would be peak rates and the US Feb will pause for a few months," said Prithviraj Kothari, Managing Director of RiddhiSiddhi Bullions (RSBL). "The sentiment can turn dovish if the Fed hints of doing so, which will be positive for gold," he added.

Market participants said that signs of dovishness from the Fed Chairman Jerome Powell would lead to the deployment of dry-powder by market participants. The recent US inflation data provided a much-needed boost for the yellow metal and dollar index below 100 mark was another added advantage for the bullion, said experts.

US treasury yield, global GDP Growth, inflation numbers, demand from key consumers like China and India and outlook of the central banks are key main factors that will guide gold prices in the remaining half of 2023. Kothari from RSBL sees strong support at Rs 58,000 for gold and sustaining above Rs 60,000 may lead to rise towards Rs 62,000.
 

"Dovish monetary policy is supportive for gold prices and expects prices to break above the recent April 2023 highs. The price action on weekly charts shows short-term moving averages getting back into action after a few weeks of sideways trend," said Chowdhury from Stoxbox who has a long-term target of Rs 62,000 and 63,650 on the gold.

Analysts and economists are expecting a mild recession in the US. Cooling inflation also gives the Fed the ability to cut rates when the economy slows. Fed might be done with hiking by July FOMC meeting, amid visible disinflationary trends.

"Though the expectations of rate cuts in 2023 have faded, gold prices might stay buoyed for the later part of the year, as a Fed pivot might lead to sustained decline in dollar index and treasury yields," said Rao from Kotak. COMEX Gold holds a good resistance near $2000/troy ounce which if penetrated on a sustained basis might give the bulls edge to take the price close to the all-time highs near $2075/troy ounce, he added.