Due to structural factors such as central bank policies, geopolitical uncertainty, the debate between hard and soft landings, increased buying interest in risky assets, and volatility in the Dollar Index and bond yields, gold and silver prices have swung drastically this year. Geopolitics and the policy positions of central banks have taken center stage. According to a Motilal Oswal Financial Services study, gold reached a near all-time high of $2,070 at the start of this year and subsequently reversed from lows of $1,800 to $2,000, resulting in extreme volatility.
During the holiday season, demand for bullion often increases. However, recent trends indicate that people are now investing when there is a good opportunity rather than waiting for a specific cause. A variety of factors contribute to the bullish trend seen in the gold market, and these reasons fluctuate frequently.
Globally, major central banks have been slowly boosting their gold reserves, which has increased gold sentiment. We've only seen two months this year where central banks were net sellers; the pace of purchases so far this year suggests that central bankers are on course for another high annual addition. According to the research, strong buying from China, Poland, Turkey, Kazakhstan, and a few other nations resulted in a net total of roughly 800 tonnes this year.
Major central banks have made aggressive monetary policy actions, with the Fed leading the charge by hiking rates 525 basis points since last year, thereby containing inflation. Nonetheless, rising wages, energy, and food costs are major concerns for central bankers, prompting them to retain their hawkish posture. Strong GDP, retail sales, and job numbers demonstrate economic resiliency. The rising interest rate environment puts pressure on non-yielding assets such as gold; thus, a change in policy is required for gold prices to continue their upward trend. At the previous Fed meeting, US central bank Governor Powell sent contradictory signals, discussing both future actions to achieve the 2% inflation goal rate and concerns about the economy's financial soundness. The shifting likelihood of additional rate hikes this year and cuts next year has produced significant volatility in safe haven assets.
Keeping an eye on the geopolitical situation has become increasingly important, as gold is widely recognised as a crisis hedge. Any market volatility has always benefited bullions; last year, we had the Russia-Ukraine war, and now we have the Israel-Hamas conflict, which has increased enthusiasm for gold, despite a rate hike possibility. The Hamas faction caught Israel off guard and launched many missiles, targeting a few public gatherings and events in Israel; the latter replied strongly with air attacks and bombardment of Gaza within a day. Initially, market participants expected this decade-long disagreement to be resolved shortly, but with suspected meddling from neighbouring states such as Jordan, Syria, Egypt, and Iran, the issue has taken an aggressive turn, according to the research.
Demand for work under the national rural jobs initiative has surged as a result of an unpredictable monsoon, but crop losses and export limits have cut agricultural revenues. A healthy rural economy is required for quicker economic growth because it fuels consumption, which is a crucial growth engine. The southwest monsoon, a lifeline for rural India, fell short by 6% of its 50-year average. Several states were affected by drought, while others were affected by floods and heavy rains; however, the degree of crop damage will be determined after the kharif harvest arrives in markets this winter. According to the survey, a large amount of gold demand comes from rural India, and this, combined with increasing costs, could dampen gold demand in the short term.
This year, gold saw a roller-coaster journey that provided opportunities for both bulls and bears, as well as bargain levels for long-term investors. Aggressive rate hikes by major central banks temporarily removed the luster from gold; nevertheless, recent events in geopolitical tensions and predictions of a shift in the current monetary policy stance provided considerable support to gold prices. There are certain headwinds for the metal, such as predictions of a soft landing, additional rate hikes, a reduction in geopolitical tensions, and rising real rates. However, the risk premium is being priced in gold, from the pandemic to the Russia-Ukraine war and the most recent Israel-Hamas conflict. A resolution to the Middle East conflict and/or the Fed's continued hawkish posture could weigh on gold prices. However, the aforementioned causes may cause a longer-than-expected hangover for gold bulls, guiding it towards a medium objective of Rs 63,000, according to the analysis.
