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Fed decisions to set the near-term direction of gold prices

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Gold Price in international and domestic markets suffered losses in the first two months of 2024. Strong US dollar, expectations of further delay in US Fed rate cuts and the rally in global stocks have affected sentiment surrounding the metal.

The US dollar has gained almost 3% since the beginning of January. Firm US economic publications and uncertainty over US rate cuts have focused investors’ attention on the US currency.

Hopes of rate cuts from the US Fed could have a significant impact on the performance of bullion. Since there is no direct relationship between U.S. interest rates and the price of gold, rate changes largely affect the value of the U.S. dollar, which is inversely correlated to gold.

Previously, it had been expected that the US Federal Reserve could cut rates as early as March, but the latest inflation data and cautious comments from the Fed fed officials say markets are reducing expectations through June.

When interest rates are lower, returns on dollar-denominated assets like bonds and savings accounts decrease. This may cause the value of the U.S. dollar to decline relative to other currencies. Because gold is valued in U.S. dollars globally, a weaker dollar makes gold cheaper for investors holding other currencies, which can increase demand for gold and its price.

Additionally, gold does not earn interest or dividends. When interest rates are higher, the opportunity cost of holding gold is also higher. As interest rates fall, the opportunity cost of holding gold decreases, making it relatively more attractive compared to interest-bearing assets and could potentially boost demand for gold. At the same time, the general fundamentals remain healthy for this raw material. Escalating tensions in West Asia and ongoing conflicts between Russia and Ukraine are raising concerns about global growth prospects, providing support for safe-haven commodities like gold. World Bank forecasts suggest the global economy is poised for its weakest half-decade performance in 30 years. They also suggested that global trade growth in 2024 is expected to be only half the average of the decade before the pandemic. Global economic uncertainty typically increases demand for gold due to its safe-haven appeal and its particular appeal as a hedge against inflation.

In the future, gold in the international market may continue to maintain a narrow range. There is less chance of major twists or liquidations immediately. However, investors are waiting for critical decisions from the US Central Bank and the global growth outlook to get a broader view of prices. The escalation of the geopolitical crisis, the performance of stock markets and the purchases of central banks are the other factors that can largely influence the short-term price direction of the metal.

Domestically, given that gold prices are still near their all-time highs, there are chances of a correction possibly during the first half of 2024. Along with this, a weak INR and demand expectations jewelry would offer downward support and could therefore preserve its positive index. outlook for the rest of the year.

Gold is one of the best long-term assets that offers both security and decent returns to its investors. Domestic gold prices have doubled in the last five years and have surged more than 980% since 2003. So, investors can take advantage of every price correction to add the metal to their portfolio for benefits long-term.

(The author is responsible for raw materials at Geojit Financial Services)

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