According to a senior official from Geojit Financial Services, the US government’s credit rating was reduced by Fitch, which led to a modest increase in gold prices.
“Gold prices saw a small boost after Fitch’s downgrading of the US government’s credit rating. Since gold is seen as a safe-haven asset, economic uncertainty and currency volatility often have a big influence on its price and demand. “Investors are turning to relatively safer assets like bullion as a result of the downgrading of the world’s largest economy’s credit rating,” said Hareesh V, Head of Commodities at Geojit Financial Services.
But Quantum Asset Management Company (AMC) anticipates a structural increase in gold prices as a result of the US Federal Reserve cutting its policy rate and higher-than-average inflation.
“Over the medium term, despite the ‘higher for longer’ rhetoric, lower inflation along with a slowdown in US growth should lead the Fed to cut rates sooner than it currently states,” Quantum AMC said in its research on the outlook for gold in August. A rate reduction coupled with inflation that is greater than usual will cause gold prices to go up structurally.
Reviewing the past, the research said that the US Federal Reserve’s hawkish stance in June caused gold to start July on a muted note, trading at $1900 per ounce levels. However, as investors continued to bet on a final interest rate rise in July, prices progressively rose throughout the month.
According to the research, based on Interest Rate Futures, the likelihood of the Fed increasing its benchmark rate by 25 basis points to a range of 5.25%-5.50% in July was over 90% for the most of the month.
While local prices increased by almost 2.9%, international gold prices ended July approximately 2.7% higher. However, Quantum AMC noted that there was some turbulence along the road.
The American central bank increased interest rates to a 22-year high at its meeting in July. Despite the fact that the 25-basis point rise was widely anticipated and that the meeting was seen as less aggressive than the one in June when Chairman Jerome Powell hinted at two further rate hikes in 2023, gold prices held steady around $1975 per ounce levels. Following the Federal Open Market Committee (FOMC) meeting, interest rates are still expected to peak at this level, according to interest rate futures.
According to the research, further declines in the monthly core inflation figures for July and August might make this the last rate increase of current tightening cycle. On the other hand, any unfavorable developments about inflation might result in further rate increases. Powell’s denial of any rate reduction in 2023 has limited gold’s upward potential, according to the research.
