Gold Hit 7-Month Low as India Tax Hike Adds to Fed Rate Cudgel

© Reuters.

By Barani Krishnan

AiVIF.com -- For gold, the Fed doesn’t seem to be its only nemesis: it’s also Indian tax authorities.

Bullion’s value took a further dive to briefly hit seven-month lows on Friday after the government in New Delhi raised import taxes on gold to support the battered rupee as trading for July opened.

India, the world’s second biggest bullion consumer, raised its basic import duty on gold to 12.5% from 7.5%. The move will immediately affect demand, even though the third quarter usually sees strong physical buying amid festivals, Ajay Kedia, director at Kedia Commodities in Mumbai, said in comments carried by Reuters.

India and China alternate as the biggest buyers of gold and any policy move by the two on the metal typically gets traders in the space flustered.

Bullion bulls were wounded for a third straight week by the central bank’s rate cudgel as policy-makers at the central bank showed no backing down in their aim to tame the inflation beast by doubling the Fed funds before the end of the year.

Front-month gold futures for August on New York’s Comex settled Friday’s trade down $5.80, or 0.3%, at $1,801.50 an ounce. Earlier in the session, August gold tumbled to $1,873.45 — its lowest since the $1,781 level plumbed on Dec. 9.

“The $1785 level was massive support for gold and if that continues to hold early next week, the precious metal should consolidate and possibly edge higher towards the $1,840 region,” Ed Moya, analyst at online trading platform OANDA, said, explaining gold’s rebound from those lows.

The rebound aside, it was a perfect week in the red for the yellow metal which settled lower in every of the five sessions to cumulatively lose some $30, or 1.6%, on the week.

It was a third straight week of losses for gold after prior drops of 0.6% and 1.9%. For June itself, gold had lost more than 2%, rounding out a straight month in the red.

For three weeks now, gold has been stuck in a $40 trading band in the low $1,800 levels.

Traders attributed gold’s malaise to the Federal Reserve’s non-stop chatter about rate hikes, matched by this month’s highest increase in 28 years by the central bank in its effort to curb inflation growing at its fastest pace in four decades.

Despite that, some gold traders still found reason to be positive about prospects in the near term.

“Gold has without doubt had a disappointing second quarter. But on the bright side, it’s probably right where it’s going to start rebounding,” said Phillip Streible, precious metals strategist for Blue Line Futures in Chicago, who admitted to buying gold at the low $1,800 levels on Thursday.

“It’s normally the case; people start giving up on gold, and then it comes back,” Streible said. “The dollar’s strength will likely dissipate once the Fed can no longer surprise us with its rate hikes. And then, bond yields will surge again, indicating inflation, which works well for gold.”

The question of how gold will react to inflation has been a conundrum for investors ever since it rose to record highs above $2,100 in August 2020, then collapsed to $1,600 levels at one point before recapturing the $2,000 level earlier this year, albeit briefly. Despite its much-touted standing as a hedge against inflation, gold’s relationship with price pressures has barely been constant the past two years.

U.S. inflation, on the other hand, has consistently risen the past nine months while the nation’s economy has been constantly under threat.

U.S. gross domestic product likely contracted by an estimated 1% in the second quarter of 2022, the Atlanta Federal Reserve said on Thursday. It was the first official forecast of recession by a division of the central bank, after the 1.6% economic decline in the first quarter.

Economists say the recession narrative could get uglier over the next 30 to 60 days as the Fed continues tightening the screws on U.S. rates.