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Gold prices soared to a new high of above ₹62,800 per 10 grams on Wednesday, November 29, in India. Globally, the rates touched a nearly seven-month high propelled by an extended decline in the US dollar and bond yields as investors grew confident that the Federal Reserve would likely cut rates by the first half of next year.

Spot gold rose 0.2% to $2,044.53 per ounce by 0453 GMT after hitting its highest since May 5. US gold futures for December delivery rose 0.3% to $2,045.40 per ounce.

Driving forces behind gold's rise

Kelvin Wong, senior market analyst for Asia Pacific at OANDA, said, "Gold is driven by an increasing market expectation of a Fed pivot from a hawkish tilt to a dovish tilt in the first half of next year — earlier than it did before."

Federal Reserve Governor Christopher Waller's recent indication of a possible rate cut in the near future has cemented market expectations that US rates have peaked. This sentiment has been reflected in traders' calculations, with a more than 70% chance of rates easing by May next year, CME's FedWatch Tool was quoted as saying in a Reuters report.

The allure of gold has been further enhanced as lower interest rates diminish the opportunity cost of holding non-interest-bearing bullion. Simultaneously, the dollar index has tumbled to a more than three-month low against its counterparts, alongside a decline in 10-year Treasury note yields to over two-month lows.

A falling dollar index often correlates with higher gold prices. Gold is priced in dollars globally, so when the dollar weakens against other major currencies, it takes more dollars to buy the same amount of gold. This inverse relationship is because a weaker dollar makes gold relatively cheaper for investors holding other currencies, increasing their purchasing power and driving up demand for gold.

Outlook

Industry experts offered diverse outlooks on gold's trajectory.

Chintan Mehta, CEO of Abans Holdings on Commodity, highlighted the complex interplay of factors influencing gold's surge, including the decline in US Treasury yields and the US Dollar Index. Mehta's assessment underscores ongoing signs of a slowdown in the US economy, coupled with geopolitical considerations like the easing tensions in the Israel-Palestine conflict, all contributing to the recent market dynamics.

Mehta said: "Participation in gold has gradually increased from lower levels. This might lead to an extended rally in gold once participation increases. We believe that gold will consolidate at its current price. Currently, we are observing an extended rally up to ₹63,200 per 10 grams. On the downside, gold may experience a correction down to ₹61,200 per 10 grams level."

As per Rahul Kalantri, VP of Commodities, Mehta Equities, gold finds support in the range of $2,036-2,024 per ounce, with resistance at $2,058-2,070 per ounce. In terms of rupee, gold has a support zone of ₹62,020-61,810 per 10 grams, with resistance at ₹62,520-62,680 per 10 grams.

A Prasanna of ICICI-Sec PD suggested that the surge in gold demand could potentially be attributed to an upswing in rural income. Despite this trend, Prasanna expressed concerns regarding persistent worries surrounding inflation, indicating a nuanced outlook on the market's dynamics.

Should one invest?

Amidst these record-breaking highs, opinions on investment vary. Mehta suggests that while participation in gold has increased, an extended rally might occur with further engagement. Kalantri anticipates volatility in the market and identifies specific support and resistance levels for gold.

Both experts indicate potential corrections in prices, signalling opportunities for investment during these fluctuations.

Mehta believes that despite potential consolidations, gold remains a favourable investment, particularly during price corrections. Investors should tread cautiously, considering expert insights on potential price corrections and consolidation while acknowledging gold's enduring appeal as an investment option amidst shifting economic landscapes.

First Published:Nov 29, 2023 12:56 PM IST