It is a week of high stakes for precious metals, with volatility in the foreground as things in the Middle East heat up and oil holds its ground. On both sides of the world, from India to global exchanges, investors are preparing for inflation data and other macro cues that may well alter the view on rates, making for some choppy trading in bullion.
Why geopolitics could cap bullion rallies
New friction in West Asia has made for riskier times in commodities. In the wake of US strikes, Iran has made good on its word with retaliatory moves against American interests in the UAE, Kuwait and Bahrain. Tehran has also put the Strait of Hormuz off limits after an incident with a vessel it claimed was not on an approved course.
Ordinarily, you would see a flight to safety in gold when there is a conflict. Not this time, though. The fear is that a spike in oil will stoke inflation, prop up the dollar and send Treasury yields up. According to analysts, that is enough to make non-yielding assets like gold and silver less of a draw.
“We are in a corrective phase,” says Pranav Mer of JM Financial Services, adding that any further movement in the metals will be a function of how the conflict plays out. A major step up in tensions, he argues, would be good for the dollar and bond yields but put a lid on any real gains in bullion.
Domestic prices mirror global pressure
The Indian market has been in line with the rest of the world, with futures finishing the week on a down note. August MCX gold was 2.65 per cent, or Rs 3,900, in the red at Rs 1.43 lakh for 10 grams. Silver for September delivery was even more affected, sliding 6.2 per cent (Rs 14,746) to Rs 2.22 lakh a kilo.
On the Comex, gold gave up USD 12 to close at USD 4,113.7 an ounce, while silver was 1.5% lower at USD 60.16. The message was plain: any short-lived bounce was met with profit taking, not new buyers.
Jateen Trivedi of LKP Securities sees the headwinds in a firmer dollar, steady oil and the idea that rates will be higher for longer. A weaker rupee does not do much to offset the bearish mood coming from abroad.
Key weekly market moves
A look at the numbers from the week’s re-pricing of bullion:
– MCX gold August: down Rs 3,900 to Rs 1.43 lakh per 10 grams
– MCX silver September: down Rs 14,746 to Rs 2.22 lakh per kilogram
– Comex gold: down USD 12 to USD 4,113.7 per ounce
– Comex silver: down 1.5% to USD 60.16 per ounce
Rates, oil and the gold trade-off
Put simply, the environment is not kind to bullion. When oil and inflation expectations go up, so do the dollar and US yields. Gold and silver have a hard time in those conditions, especially when there is a tendency to book profits at the first sign of a rally.
That is the reason behind the lack of follow-through in recent sessions. Absent a dovish turn on rates or a de-escalation of risks, expect the price action to be contained, with any moves tending to fizzle out.
Data points that can move the needle
All eyes are on the macro data that might change the rate story. Inflation figures from the US, India and Europe will be pored over for hints on what the central banks have in mind. A number to the upside would only make for tighter conditions.
Then there is the US calendar with its retail sales, housing and jobless claims. They all factor into the Fed’s view; if they come in strong, it could put off any talk of easing and put more weight on non-yielding assets.
China’s output is just as relevant for the wider commodity picture. The market will be watching GDP, lending, trade and industrial production for any indication that demand is holding. A pick-up in industry could find its way to silver, given its use in manufacturing as well as its status as a store of value.
What traders are positioning for
In the words of one analyst, the plan for the near term is to be disciplined and mindful of event risk:
– Geopolitics will call the shots; oil will be the barometer for inflation
– The dollar and rates will be the deciding factors for bullion
– Until there is a solid macro reason to do otherwise, rallies will be sold into
Bottom line: volatility with a ceiling
For now, gold and silver are being tugged between the pull of a safe haven and the reality of higher yields. With the US and Iran in the spotlight and a lot of data to come, the road ahead is more likely to be bumpy than a straight line. Without a catalyst, we should see a lot of range-bound activity.
