Here are the edited excerpts from the interview:
Bullion appears to be going nowhere as on one hand economic indicators remain robust in the US, rubbishing any claim of a likely recession while on the other, Fed still not budging on rate hikes, and now the Fitch downgrade. What’s your take on this?
Gold remained stuck with a limited upside seen since the Fed hiked interest rates by 25 bps on July 26. The upside was limited since the Fed move led to a rise in US 10Y yields weighing on Gold appeal. The US data since the last FOMC meeting were mixed as the Manufacturing PMIs remain below 50 since the start of the year while labour market still remains tight as seen in ADP figures. Meanwhile, the non-farm payrolls continued to decline over the past 2 months, showing early signs of moderating Jobs growth.
Overall certain indicators still show the US Economy has started to witness a slowdown with non-farm labour productivity having jumped in the second quarter of the current year after five declining quarters mainly due to fewer labour hours worked. This usually happens because firms cut employee hours during the initial stages of the slowing economy to reduce costs.
We expect high volatility in Gold prices in the near term as a further downside of 1 – 2 % is still possible from current levels in International spot markets (CMP $ 1,940 per ounce) which translates to a downside up to $ 1,905 per ounce. The domestic physical demand is also expected to remain subdued in August as it is a seasonally weak month for the yellow metal.
The Fitch downgrade of the US credit rating is a signal of weakness in the US economy which bodes well for Gold’s safe-haven appeal for the long term. Ironically gold prices didn’t respond on the positive side to Fitch ratings downgrade as US 10-year yield rose sharply in the current week with investors bracing for record government borrowings. Fitch warned that the US budget deficit could grow to 6.9% of GDP in two years. The US treasury revised its borrowing requirement for the current quarter to $1 trillion, up 30% from the estimates 3 months back.
We however see likely chances of the US Fed getting done with its rate hike campaign while they might keep it elevated for an extended period now. Given declining unit labour costs in the second quarter suggest softer core inflation in the pipeline. However, the rise in Crude prices over the past month may keep headline inflation sticky in the near months.
What is triggering the current nosedive in Silver which has been on a roller coaster ride this year, though it is traditionally more volatile than gold?
Since silver is traditionally used as an industrial metal while it also caters to Investment demand in uncertain economic times which makes it a volatile metal as compared to gold. In the first half of the year expectations of deficit persisting in the Silver market along with a combination of global uncertainties kept prices highly volatile.
Silver prices however outperformed gold last month with a jump of around 8%. The spike in silver prices was led by expectations of increased industrial demand for the metal amid optimism over more stimulus measures in China. Gains in prices of base metals also improved sentiment for silver.
However, strength in the dollar and US Yields have dimmed the appeal of Silver as an investment asset in recent sessions.
Gold could dive 1 -2% in the near term, silver could also likely turn volatile. However, given long-term deficit expectations we expect silver prices to give decent 15 – 20% returns in 1 – 2 years scenario.
The dollar remains crucial to bullion’s fortunes. What is its outlook and where do you see it heading?
The Dollar Index (DXY) is delicately poised and heading into the second month of the current quarter. The ongoing narrative for a soft landing could end up hurting the US Dollar moving forward if US equities continue to rise. A rate hike of 25 bps was delivered in the July meeting, with the accompanying statement almost a carbon copy as of the June meeting.
Chair Jerome Powell left the door open for another rate hike in September, without giving any indication of preference. The data-driven approach of the Fed might cause volatility in upcoming sessions. However, we see the Dollar Index broadly remain in the range of 101 – 104 for the current month.
What is the near, medium-term, and long-term outlook on gold and silver futures?
In the near term high volatility is expected in the precious metals complex as a fall of 1–2 % remains likely, especially in Gold given elevated 10Y yields and a strong dollar.
On a fundamental front, sentiments in Gold remain supportive as Global Central Bank data shows banks bought a net 55 tonne of gold in June following three straight months of selling.
The Central Bank of Turkey returned to net buying in June and that helped the trend in central bank demand remain steady in 2023. Though, global physically-backed gold ETFs experienced net outflows since June, calling a halt to their three-month inflow streak from March-May 2023 which indicates that ETF demand is not picking up in the near term.
Meanwhile, the 10-year yields, which is a proxy for inflation, are currently trading around 4.18 % having peaked around 4.24 % in October last year, a 16-year peak as US Core inflation peaked in the same period. Given expectations of volatility to persist in 10Y yields in coming weeks which could again keep Gold highly volatile.
However as discussed earlier macro indicators of the US are expected to show a slowdown in the economy in the last quarter of the year as the impact of elevated interest rates takes place, we expect Gold to trade with limited downside in long term scenario where recessionary concerns could again emerge towards the start of next year and propel gold to new highs in 2024.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)