Why gold prices have risen to all-time high and do experts see more gains ahead?

The latest trigger for gold has been an easing of inflationary pressure in the US and expectations for smaller interest rate hikes. Data released on Thursday showed that U.S consumer prices fell for the first time in more two years in December, offering hope that inflation was now on a sustained downward trend. The Labor Department’s report showed U.S. consumer prices grew 6.5% on an annual basis in December, in line with expectations, from a 7.1% rise last month.

Gold is an international commodity and is priced in US dollar  – so a softness in the greenback lifts the prices of the yellow metal. The US Dollar index has softened from its high of 114 level witnessed in September to 102 levels.

Gold’s rally has also been supported by a pullback in US bond yields. The precious metal is considered an inflation hedge, but is highly sensitive to rising interest rates, which increase the opportunity cost of holding the non-yielding bullion.

“Slowing inflation means less aggressive interest rate hikes by Fed. A per the CME Fed watch tool the probability of a 25-bps hike in Feb FOMC meeting has gone up to 92.7%. This has supported gold prices to trade above the resistance of $1884/oz which is the 8-month high. On the price action front COMEX gold has closed above the resistance of $1884/oz. The bulls might now target the next resistance near $1920/oz. Support now is pegged near $1870/oz. Break of $1870/oz on closing might indicate a false breakout,” said Ravindra V. Rao, CMT, EPAT, VP-Head Commodity Research, Kotak Securities Ltd.

Whether or not the metal can maintain the upward momentum depends on the rate hike decision by the Federal Reserve in its February meeting, says Rahul Kalantri, VP Commodities, Mehta Equities Ltd. The US inflation report came in line with market expectations, but still considered to be on the higher side, he said. 

Technically, says Jateen Trivedi, VP Research Analyst at LKP Securities, MCX gold prices have strong support of ₹55,000 and $1850-1855 in Comex.

The recession fear in the West, and geopolitical tensions have also played their part in the hardening of gold prices, say analysts. Gold is considered a safe haven and often attracts investments in times of uncertainty and slowdown, recession in the economy. 

Axis Securities has a neutral stance on gold and recommends a ‘Buy-on-Dips’ strategy. “Gold will continue to be a preferred asset class until uncertainties over the Russia-Ukraine conflict fades and will continue to attract investments as a proven hedge against other asset classes,” the brokerage said. 

Central banks have bought a net 50 tonnes of gold in November, up 47% MoM,a according to Emkay Wealth Management. “This led to a rise in demand for the yellow metal, perhaps this offset the selling by ETFs. A consistent rise in yields and expectations of Fed rate hikes will keep gold prices in focus. Policy changes, if any, will be at least two quarters away given the persistence of inflation as also target levels being quite far away from the current inflation reading. Gold is poised to move up with the right indications in interest rates, especially US rates,” it said.