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NEW DELHI: Gold prices could come under pressure in the near term due to higher bond yields and the resolution of the Russia-Ukraine conflict sooner or later, according to Quantum Asset Management Company.
Given the geopolitical and macroeconomic backdrop, the fund house suggests that this could potentially be a good opportunity for investors to enter the market for the medium to long term, to benefit from various risks and structural disruptions which will be conducive for gold.
Buoyed by the uncertainty, risk aversion, and inflation push of the Russia-Ukraine war, gold rallied to $2,050 in early March, before cooling down to $1,925 by the end of the month, thanks to a very hawkish US Federal Reserve.
Higher oil prices and a sharp hawkish repricing of the US Federal Reserve rate hike expectations led to foreign money outflows and depreciated the dollar-rupee exchange rate to all-time lows before settling at 76 levels, giving domestic gold prices an extra push.
“We are in the second month of Russia’s invasion of Ukraine. The conflict appears to have reached a stalemate and could either see a resolution soon or escalate further as experts warn Russia could resort to using tactical nuclear strikes to get ahead. Such escalation would hurt investor sentiment, roil markets and propel gold prices," said Chirag Mehta, CIO and Ghazal Jain, fund manager-alternative Investment, Quantum AMC.
Even if the conflict comes to an end, the fund house expects gold prices to reflect some risk premiums as the geopolitical ripple effects of the war unfold.
The economic sanctions against Russia will continue even after the war and will continue to pressure global energy and food supply chains, stimulating inflation and keeping gold relevant, the experts added.
In terms of inflation, with a total of six potential rate hikes left for the year based on the number of FOMC meetings scheduled, US rates could be between 2% and 2.5% by December, up from 0% at the start of 2022, making this the sharpest Fed pivot in 20 years.
“In theory, a hawkish Fed isn’t good news for gold. But while the Fed is currently emboldened by the resilience of the economy and financial markets, its aggressiveness will be tested by a possible economic slowdown or stock market turbulence, which will have bullish implications for gold," the experts added.
On the other hand, if the Fed remains focused on reining in inflation as aggressively as it has suggested, substantial pain awaits the global economy.
As per the fund house, for now, gold will continue to be pulled in different directions as investors struggle to determine whether a potential recession and other economic repercussions of the Russia-Ukraine war or monetary tightening by the Fed to tackle inflation has bigger implications for the metal.
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