Gold prices languish near 29-month low in run-up to US Fed meeting; India demand also weakens

Gold prices hit a 29-month low last week, as the dollar and US Treasury yields rose on expectations the U.S. Federal Reserve will deliver a steep rate hike when it meets this week.

The Fed, at the conclusion of its two-day policy meeting, is expected to raise interest rates by 75 basis points to combat stubbornly-high inflation, with markets even seeing a 20% chance for a 100 bps increase. Concerns about surging inflation have also prompted other central banks to tighten monetary policy.

Although gold is considered a hedge against inflation, higher interest rates lift the opportunity cost of holding zero-yield bullion. The dollar held close to two-decade highs, making greenback-priced bullion more expensive for overseas buyers.

Gold sales in India may also suffer this year as inflationary pressures and an erratic monsoon could hurt farmers’ incomes, reducing their ability to buy the precious metal. An increase in the import tax in July also reduced appetite for the precious metal in the second-biggest consumer.

Precious metals analysts now expect demand in 2022 to be little changed from last year, slashing earlier forecast of 7% to 8% growth. Rural demand accounts for about 60% of India’s gold consumption and the consumer base relies mainly on agriculture and allied industries for their incomes. Patchy rains have led to lower plantings of key staples rice, some oilseeds and pulses during the ongoing summer-sown monsoon crop season.

Gold consumption surged to 800 tonnes last year as the easing of virus-related restrictions unleashed demand. The jump in demand and rising imports forced the government to raise the import tax on gold to reduce inflows after the country’s widening trade gap pushed the rupee to a record low. Spot gold prices globally have fallen about 9% this year and plunged to the lowest since 2020 last week amid expectations of more aggressive monetary tightening by the US Federal Reserve as it tries to cool inflation. That’s pushed prices in India below the key Rs 50,000 rupees per 10 grams level, which could boost demand during the festival season.

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