Gold plunged to a near five-month low on optimistic US economic releases, a strong US dollar, and firm global equities which faded its safe-haven appeal. Higher US treasury yields and concerns over physical demand from key Asian counties due to the spread of the virulent Delta variant of Covid-19 also cast doubts on the prospects of the commodity.
The benchmark London spot prices tested a five-month low in August after an encouraging US payroll number. It lost more than 8 percent in the first week but slightly recovered later. Domestic gold too lost its momentum, but a weak currency and seasonal demand limited the losses.
The US dollar swiftly gained after a better-than-expected US employment number. A rebound in the dollar reduced the appeal of gold. US dollar is the benchmark pricing mechanism for gold and hence it is inversely correlated to the US currency.
In July, US employers added 9,43,000 jobs and the unemployment rate was down to 5.4 percent, indicating the economy is bouncing back robustly from the negative effects of Covid-19. The rollout of vaccines encouraged businesses to reopen which demanded more labour force in the country. As per data, a record of 9.2 million openings were reported in May.
Investors bet on the US economy and currency, which limited the demand for safe haven investments like gold. As per International Monetary Fund, the US economic output will grow 7 percent this year, its fastest pace since 1984.
However, positive job numbers and increased growth forecast raised concerns that the US Federal Reserve will soon start to taper its massive economic stimulus program. Change in monetary policy is an important price driver of gold. Tightening fiscal policies is usually detrimental to gold and vice versa.
Meanwhile, concerns over the new and more virulent Delta variant of Covid-19 in some emerging markets continue to support the yellow metal. There are also worries that the new virus variant may hit the physical demand from the top consuming Asian countries.
Prices are also pounded by a surge in equities, as arise in stocks prices usually reduces the appeal of safe assets like bullion. Many of the global stock indexes are either at record or multi-year highs. The US Dow Jones and the benchmark S&P 500 jumped to all-time peaks after the US Senate passed a $1 trillion bipartisan infrastructure package. In India, domestic equity indices too scaled to record highs this week.
After the US Senate passed the massive infrastructure bill the US Treasury yields rose to the highest level since mid-July. Higher bond yields decrease the appeal of gold as it increases the opportunity cost of holding non-interest-bearing assets.
Gold is also considered a safe investment option during periods of economic and market turmoil. However, the risk sentiment in the wider financial markets remained subdued, as new virus cases in several Asian countries continued to surge. This may threaten the economic outlook and drove some investors towards safe-haven assets.
The ongoing fundamentals continue to pressure the short-term outlook of the metal. Prices track the economic crosscurrents like yield outlook, fiscal policy, and economic growth outlook. Higher bond yields weigh on non-yielding gold, as it raises its opportunity cost. The US Fed’s policy actions also influence the US greenback directly. A strong US dollar will make gold prices more expensive for holders of other currencies and vice versa. However, in the domestic market, a weak currency may limit major liquidation in prices.
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