It was a dismal week for commodities as most of them recorded multi-month lows amid growth worries and firmness in the US dollar.

Gold was not left out as it fell 3.8 per cent marking its fourth weekly decline and tested the lowest level since September 2021.

Gold, a safe haven, an inflation hedge, and an alternative for equities, has come under pressure despite increasing growth risks and concerns about China’s virus spread,

inflationary pressure global, and continuing correction in the equity market.

Gold is struggling to revive its appeal as market players are thronging on the US dollar as their preferred safe-haven asset.

The US dollar index has been on the rise since the start of the year; however, the pace of gains has increased lately, putting pressure on commodities at large. Other safe havens like the Japanese Yen and Swiss France have failed to benefit as much.

The US dollar has gained nearly 3 per cent since the start of the month and has tested the highest level since 2002. The index rose a total of about 4 per cent in the entire first quarter.

The sudden rise in the US currency around the start of the new quarter or the second half of the year shows that investors are still uncertain about the future outlook and want to remain invested in the US dollar.

Demand for safe havens remains high amid increasing expectations that the US and global economic activity may slow down aggressively.

Resurgence in virus cases in China and its strict adherence to the zero Covid policy kept concerns about the health of the economy. Mixed economic data from major economies also highlights increasing stress.

The other major factor for the US dollar’s rise is the Fed’s aggressive monetary tightening stance. Fed officials have repeatedly warned about higher inflation and may continue with rate hikes until there are some signs of easing in price pressure.

While the US economic data has been mixed, showing signs of struggle in the economy, the US labour market remains strong and this may give the US Fed room to continue with rate hikes. The latest US non-farm payrolls report noted a bigger than expected 372,000 growth in jobs last month while the unemployment rate was steady at 3.6%, and hourly earnings rose slightly more than expected on a year-on-year basis.

While the US dollar strength is the major reason for weakness in gold, its inflation hedge demand has been tarnished by a correction in commodities at large.

NYMEX crude slumped to April lows while copper led the industrial metals lower and tested 19-month lows. If commodities continue to correct, it may hamper inflation expectations as well.

However, we are yet to see any concrete signs that inflation has peaked.

Gold is also pressurized due to continuing exodus by investors as they remain uncertain about future price movement. Gold holdings with SPDR ETF fell by more than 25 tonnes in the first four trading sessions of the month.

The entire month of June saw a net outflow of nearly 18 tonnes. The pick-up in the pace of ETF outflows shows waning market confidence in future price rallies amid a monetary tightening environment.

Gold has been falling for the last few weeks; however, it has now broken the $1800/oz level and tested its 9-month low, which shows strong bearish sentiment.

We may see prices remaining under pressure unless the US dollar index corrects significantly. The US dollar index could stumble on concerns about the health of the US economy as well as the monetary tightening stance of other central banks.

The next major event for the US dollar is US inflation data next week and ECB’s monetary policy decision later this month.

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