Gold is shining brighter than ever as investors flock to the safe-haven asset amid global banking worries. The yellow metal has hit a record high on Friday and is poised to cross Rs 60,000 per 10 gram for the first time next week on the domestic front. On the international market, gold surged more than 2% on Friday and posted its biggest weekly gain in three years.
What's driving gold prices?
The main factor behind the rally in gold prices is the rising uncertainty and risk aversion in the global financial markets. A series of banking crises have rattled investors' confidence and sparked fears of contagion and systemic collapse.
The most prominent case is that of Evergrande Group, China's second-largest property developer, which is facing a debt crisis of over $300 billion and has missed several interest payments. The company's woes have triggered protests by angry homebuyers and creditors and raised concerns about its impact on China's economy and financial stability.
Another source of worry is the turmoil in Turkey's banking sector, which has been hit by a sharp depreciation of the lira currency and soaring inflation. The Turkish central bank has been under pressure from President Recep Tayyip Erdogan to cut interest rates despite rising prices, leading to a loss of credibility and confidence among investors. The lira plunged to a record low of 15.5 per dollar on Friday.
In Europe, another banking crisis is brewing as Banca Monte dei Paschi di Siena (MPS), Italy's oldest lender, faces an uncertain future after failing to find a buyer or merger partner. The bank has been struggling with bad loans and losses for years and has received multiple bailouts from the Italian government. However, its fate now depends on whether it can secure approval from the European Central Bank (ECB) for another state-backed rescue plan.
These banking crises have increased the demand for gold as a safe-haven asset that can preserve wealth and hedge against inflation and currency devaluation. Gold is also seen as an alternative to fiat currencies that are losing value due to loose monetary policies by central banks around the world.
The US Federal Reserve (Fed) has been one of the most dovish central banks amid the pandemic-induced economic slowdown. The Fed has kept its benchmark interest rate near zero since March 2020 and has been buying $120 billion worth of bonds every month to support the recovery. However, this ultra-easy monetary policy has also fueled inflationary pressures in the US economy.
The US consumer price index (CPI) rose 6.8% year-on-year in November 2020, marking the highest annual inflation rate since June 1982. The core CPI, which excludes food and energy prices, increased 4.9% year-on-year, also reaching a nearly four-decade high.
The Fed has maintained that inflation is transitory and will ease as supply chain bottlenecks are resolved and pandemic-related factors fade away. However, some market participants are skeptical about this view and expect inflation to remain elevated for longer than anticipated by the Fed.
This has led to speculation that the Fed may have to tighten its monetary policy sooner than expected to rein in inflation and prevent overheating of the economy. The Fed is widely expected to announce a faster pace of tapering its bond purchases at its policy meeting next week (December 14-15). Some analysts also expect the Fed to signal an earlier start of interest rate hikes than previously projected.
However, others believe that the Fed will remain cautious and patient in withdrawing its stimulus measures given the uncertainty surrounding Covid-19 variants such as Omicron and their potential impact on economic activity and public health. They argue that the Fed will not risk derailing the recovery by raising rates too soon or too fast and will tolerate higher inflation for longer to support employment growth and income distribution. These divergent expectations about the Fed's policy stance have created volatility and confusion in the bond market, where yields have fluctuated sharply in recent weeks. The yield on the benchmark 10-year US Treasury note, which moves inversely with bond prices, rose above 1.6% on Friday, up from around 1.3% at the end of November. Higher bond yields tend to weigh on gold prices, as they increase the opportunity cost of holding non-interest-bearing.
