Gold prices nosedived below the key $1700/oz level and ended the week with a decline of about 1.5 per cent marking its third weekly fall. These three weeks of losses have come on the back of four weeks of consecutive gains. The sharp and mixed movement reflects the lack of confidence in the market.

Global growth worries have intensified amid persistent high inflation, power crisis in Europe and China and China’s struggle with covid. Global growth worries have dampened risk appetite and caused market players to shift to the safety of the US dollar, however other safe havens like gold, bonds, Japanese Yen and Swiss France have failed to attract buyers due to their individual challenges.

The US dollar has been on a rise and has tested 2002 highs on multiple occasions this year. It is seen as the preferred asset as the US economy is expected to do better than other economies and as the US Fed is expected to lead other central banks in monetary tightening.

The recent leg of the rally in the US dollar came in after hawkish comments from Fed officials whacked out even the smallest dove from the market. While the Fed has always maintained its priority to get inflation under control, market players debated the possibility of a slowdown amid signs of stress in the economy and some improvement in the inflation situation. Back-to-back hawkish comments from Fed officials including Fed Chairman Jerome Powell cemented market expectations that rate hikes may continue until inflation comes under control. After debating between a 50 basis point or a 75 basis point rate hike for the upcoming September meeting, market players are now expecting that the central bank may raise the interest rate by 0.75 per cent for a third straight meeting.

Comments from the Fed officials indicate that the central bank may not alter its stance unless inflation comes under control. While market sentiment remains skewed toward aggressive moves, the debate about Fed’s future moves may continue as the US central bank may also want to avoid a major slowdown. Signs of stress in the economy are increasing. Recently, the US non-farm payrolls report noted that job growth slowed significantly last month. After a huge 5,26,000 growth in jobs in July, jobs rose by just 3,08,000 last month while the unemployment rate inched up from 3.5 to 3.7 per cent. While the Fed was seen as leading in rate hikes, other central banks are also catching up. A number of ECB officials have expressed the need for aggressive moves to get inflation under control. The next test may come from the ECB’s monetary policy decision next week.

Gold is additionally pressurized by concerns about consumer demand. The outlook for the Chinese economy has weakened significantly amid strict adherence to zero-COVID policy, there is stress in the property market and a power crisis in some regions. We saw a brief respite as China stepped up efforts to support the economy in form of higher infrastructure spending however growth worries resurfaced amid mixed economic numbers and a fresh surge in virus cases. Indian demand outlook was also challenged due to higher prices on the back of a weaker rupee and higher customs duty.

Amid gold’s struggle for direction, ETF investors have continued to exit. Gold holdings with SPDR ETF fell to the lowest level since April 2020 this week. ETF investors may stay away unless there is a clear price outlook for the metal.

Gold has seen its ups and downs and this trend may continue in the near term as market players assess global economic health, central bank monetary policy stance as well as geopolitical issues. While the sentiment has weakened significantly, the US dollar could waver as market players focus on increasing challenges for the US economy as well as the hawkish stance of other central banks which means that some corrective rebound can’t be ruled out. Two major events to look for in the near term is ECB’s monetary policy decision on September 8, 2022, which may set the stage for Fed’s meeting later this month.