Gold prices recovered from a more than four-month low in the second week of August due to receding investor concerns over the possible scaling back of U.S. economic stimulus measures.
Bullion hit the low after strong U.S. jobs data had stoked sentiment that the Federal Reserve (central bank) might start to reduce its asset buying programme.
Gold prices recovered during the second week of August, gaining after the release of disappointing figures from the University of Michigan’s survey of consumer confidence. Gold was up 1.4 percent to $1,776.21 per ounce on August 13.
“As tends to be usual when big corrections like those we have been seeing occur, the price moves tend to be overdone and we have seen a partial recovery in prices,” wrote Lawrie Williams, gold market commentator with bullion dealer Sharps Pixley.
“We anticipate a full correction back to the $1,800 level to take place in the short to medium term.”
The outlook for gold is expected to be tied up with the pandemic for some time, with rising cases of the Delta variant and obstacles to the vaccine rollouts potentially set to drag on economic growth around the world and support gold.
Economic stimulus measures tend to underpin gold prices, with historically low interest rates increasing the appeal of non-yielding bullion relative to yield-bearing assets. Any expectations of a tapering of stimulus measures will have the opposite effect and drag on gold prices.
Respected strategic investor Michael Gentile told Kitco News that he believed U.S. monetary authorities were reluctant to raise interest rates despite rising inflation, because of the ballooning public debt linked to the pandemic.
Gentile saw two possible scenarios: either the Federal Reserve raises rates by 25 basis points next year to regain confidence in the markets, or they take no action while inflation persists. Neither of these scenarios will be enough to contain inflation.
The continuing inflation backdrop will likely give support to gold, which is undervalued. Gold is often viewed as a hedge against rising prices.
The softening of the dollar after the weak reading of U.S. consumer sentiment, will make it easier for UK savers holding sterling to acquire dollar-denominated gold.
The pound has emerged as one of the best-performing G-10 currencies, supported by falling COVID-19 cases and a high vaccination rate, which has enabled UK authorities to lift restrictions.
The latest GDP data also suggested that the UK economy was on the road to recovery, supporting the pound.