It was a challenging week for commodities and gold was not left unaffected. Gold wavered between gains and losses and ended the week with a modest gain of 0.6%.

Gold fell for the second consecutive week after four weeks of consecutive gains which shows that bulls are losing confidence and the key $1,800/oz level remains elusive.

The US dollar continues to be the key price determining factor for gold and this may not change soon as market players try to assess the Fed’s future monetary policy stance.

Gold ended lower for the second consecutive week while the US dollar index registered its second weekly rise and tested a 5-week high.

The US dollar index has witnessed increased volatility in the last few days which shows increasing uncertainty about Fed’s monetary policy stance.

Comments from the US Fed officials indicate that the central bank plans to continue with rate hikes as inflation is still out of control.

Mixed economic data highlights increasing challenges for the economy, and this has fuelled debate if the central bank may slow down the pace of rate hikes.

The recent volatility was amid positioning for the US Fed Chairman Jerome Powell’s comments at the annual Jackson Hole Symposium.

The Fed Chairman maintained his stance. However, it was enough to result in a late week sell-off in commodities and equities.

The Fed Chairman reaffirmed the need for continuing with the rate hikes to get inflation under control. Powell said that the economy needs tight policy for some time before inflation is under control.

While the Fed has maintained the need for rate hikes, market players may continue to react to economic numbers and central bank comments to determine future trend.

The Fed may not alter its stance much unless there are clear signs that inflation has come under control.

We saw some signs of improvement as US consumer sentiment data showed that 1-year inflation expectations have eased from 5.2% to 4.8% while 5-year inflation expectations were steady at 2.9%.

While gold has continued to sway with the US dollar, it has managed to gain some support from increasing uncertainty about the health of major economies.

Gold’s appeal as an inflation hedge has also improved as Europe and China’s power crisis threatens to worsen the inflation situation. Continuing tensions between US and China over Taiwan, Russia-Ukraine’s 6-months old war and US military strike in Syria on Iran linked targets also increased gold’s safe haven appeal.

Market players also looked at China to determine consumer demand for gold. Outlook for the Chinese economy has worsened amid struggle with the virus spread, stress in the property market and worsening power situation.

Market sentiment however improved as China stepped up efforts to support the economy in the form of increased infrastructure spending and increased lending to the property sector.

Rise in China’s gold imports also reflected buying interest despite challenges to the economy and weakness in the Chinese yuan. Net gold imports jumped from 40.563 tonnes in June to 48.773 tonnes in July.

The biggest challenge for gold however is lack of investor interest. Gold holdings with the SPDR ETF have slipped to January lows. Investors may not re-enter unless they are confident about the price trend.

Gold has few opportunities in the form of increased volatility in the US dollar, weakening global economic outlook, geopolitical issues and persisting inflation pressure but also faces challenges in form of monetary tightening outlook of Fed and other central banks, lack of investor buying and concerns about consumer demand.

With mixed factors in place, gold may continue to hover in a range; however, price may remain under pressure unless there is a decisive change in Fed’s monetary policy stance.

Further cues may come from US non-farm payrolls report which may reflect upon health of the labour market, a major factor affecting Fed’s monetary policy stance.

Job gains have been erratic but strong which reflects strength in the labour market; however, rising inflation and slower growth pose challenges for the sector.

(The author is Associate Vice President – Commodity Research at Kotak Securities. Recommendations, suggestions, views and opinions are here own. These do not represent the views of Economic Times)