Where gold prices are headed to?

Gold rates have been stuck in a tight range for quite some time now. The bullion traders are torn between negative factors like aggressive rate hikes by central banks, rising bond yield and a stronger dollar on one end and on the positive front, a high inflation environment, probability of a recession, and a fragile geopolitical situation thanks to the Russian –Ukrainian war and the Covid clam down in China. Yesterday’s Fed speech was widely expected to set the tone for the central bank action, going forward, which in turn would give clarity to gold traders. Unfortunately, the Fed statements didn’t help outline a clear direction. On one hand, the Fed chair made it clear that aggressive rate hikes were clearly on the cards to tame inflation, but he also tried alleviating recession fears by claiming that the economy was robust enough to absorb the interest rate hikes.

The Federal Reserve Chairman told congressional lawmakers today that the central bank is determined to bring down inflation, and can also make that happen. The Fed chair stated that “At the Fed, we understand the hardship high inflation is causing. We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so,” He has set the inflation target at 2% and said that the ongoing interest rate hikes will continue, and the pace will be a function of incoming data and the evolving outlook for the economy.

The sentiments remain weak amid doubts that the central banks could continue to hike interest rates to curb the soaring inflation without having to affect the economic growth. A combination of high-interest rates and low growth could easily push the global economy into a recessionary phase. To add to this, global supply chain disruptions and bottlenecks caused by the Russia-Ukraine war and the recent COVID-19-related lockdown in China continue to fuel the inflationary surge, thereby fanning recession fears.

While high inflation and risk-off sentiments are ideal for safe-haven assets like gold, we have seen in the recent past that a large part of the safe-haven flows has moved towards USD. Additionally, with rising rates, the bond yields are sure to rise, thereby diverting additional flows from a non-interest-yielding asset like gold. Thus, a strong currency coupled with a rising bond yield will restrict gold’s upside. The metal is expected to trade in a broad range of $1805 to $1860, reacting to various macro data that will be published in the coming week.