This week has brought an end to the first half of 2022, and it has been a volatile one for gold as well as commodities at large. We are facing uncertain times ahead as market players try to assess the implication of higher interest rates on economic growth while the Russia-Ukraine fighting continues to intensify.

Gold witnessed mixed trade in the first half of the year and has registered a modest near 1 per cent decline. The second quarter saw some selling pressure in bullion, and gold declined 7 per cent.

Meanwhile, gold ended with a decline of near 1.5 per cent this week, marking its third consecutive fall.

The trend in gold shows that bulls are moving away from the market, however, the price is still trying to hold close to the key $1800/oz level.

Gold is considered a safe haven, as well as, an inflation hedge. However, it has struggled to gain despite increasing growth concerns, persisting inflationary pressures, and selling pressure in the equity market.

Data released this week showed increasing stress on major economies while inflation remains at elevated levels. The US consumer confidence and manufacturing PMI fell more than expectations while Q1 GDP was revised further down and personal spending rose at a slower pace.

Core PCE price index, however, rose at a slower pace indicating some easing in price pressure.

Amid other economies, euro-zone consumer prices rose at a record pace last month while the German unemployment change unexpectedly rose. However, German consumer prices rose at a slower pace.

Despite increasing stress on economies, comments from central bank officials indicated that the current focus is on getting inflation under control and they may not alter their stance even if it slows economic activity to some extent.

The US Federal Reserve Chairman Jerome Powell said he was more concerned about the risk of failing to stamp out high inflation than about the possibility of raising interest rates too high and pushing the economy into a recession.

European Central Bank President Christine Lagarde said they were ready to raise rates at a faster pace, if needed, and if inflation continues to shoot higher. Bank of England Governor Andrew Bailey remained non-committal about future moves saying that they may not necessarily have to act “forcefully” to get inflation under control.

In an already struggling market, the latest jolt has come from India. The Indian government has decided to raise the basic customs duty from 7.5% to 12.5% while exempting the social welfare surcharge. The total tax incidence may increase from 10.75% to 15%.

The move came in amid higher gold imports and increasing pressure on the Indian rupee which has slumped to a record low level. As per Reuters estimate, India imported 101 tonnes of gold in May, compared to 13 tonnes a year earlier.

The import duty hike may help reduce imports and help control the trade deficit and also increase government revenues. However, it may also increase challenges for the industry and hamper demand.

Higher prices due to duty hikes, slower economic activity, and tightening liquidity conditions due to interest rate hikes may impact demand significantly.

Indian gold prices were already trading at a discount due to sluggish activity in the physical market. As per a Reuters report, discounts rose to about $40 an ounce over official domestic prices, up from $8/oz a week ago.

The move may also affect exports. Indian gems and jewellery exports during May witnessed a year-on-year growth of 20%, as per the Gem and Jewellery Export Promotion Council estimate.

Gold was already struggling to hold its ground amid increasing efforts to get inflation under control and India’s duty hike may put further pressure on prices.

With the focus still on monetary policy, market players may continue to react to economic numbers and central bank comments.

What to watch out next week:
The key event in the coming week includes US non-farm payrolls and FOMC minutes. US jobs report is expected to show slower growth in jobs last month, however, Fed is unlikely to change its stance with one negative reading.

FOMC minutes may reaffirm the central bank’s stance to continue with monetary tightening.

There is little that could come in support of gold prices, however, we may see some gains if the US dollar loses momentum on concerns about the health of the US economy.

(The author is Associate Vice President – Commodity Research at Kotak Securities)