How gold acts as a barometer of economic stability

In the world of money, gold has always been fascinating. Its value is not merely measured in carats or purity but in its ability to provide a haven of stability in turbulent economic waters. Gold can act as a smart signal to understand if the economy is going well. Even when the economy is always changing, gold stays strong. It is like a lighthouse that shows a good way for people who know how to see its signals.

But here’s the thing: just looking at gold by itself doesn’t give us the whole picture. It’s like having one puzzle piece but not the whole puzzle. When we look at how gold connects to other financial things, it’s like finding hidden treasure. In this article, we will explore how gold links up with bond yields, crude oil, and the USD INR exchange rate.

Let us understand the effect of an increase in bond yields on the overall market. The 10-year US Government Bond Yield has surged to its highest level since 2007. This significant increase in bond yields is driven by rising interest rates and further fueled by geopolitical risks.

Higher bond yields can lead to increased borrowing costs for businesses and individuals, potentially affecting consumer spending and economic growth. Higher bond yields can further put downward pressure on stock markets, as they make equities comparatively less attractive thereby leading to increased market volatility and market corrections.

The above figure displays the ratio chart of Gold (US$/OZ) to the United States 10-year Government Bonds Yield. Notably, the current ratio of both variables is hovering near its lowest point since 2010.

This indicates that the days of underperformance of Gold and rising bond yields could end soon. Gold could outperform bond yields from here.

The following shows the US gold prices chart forming a cup and handle pattern. When US gold prices rise or fall, it can set a trend for gold prices worldwide, including India.

The table below displays the extent of USD/INR depreciation in the month of October over the past five years. A depreciation of the Indian Rupee (INR) can make gold, which is denominated in US dollars more expensive for Indian consumers and investors, potentially driving up demand for gold within the Indian market. Consequently, a depreciation of the INR is associated with higher gold prices in India.

Finally, as we observe the interplay between these elements, it becomes evident that gold’s role extends beyond its traditional allure and serves as a barometer of economic stability. Monitoring these interactions can provide a more comprehensive understanding of the financial markets.

Technical Outlook:

This week, the markets experienced a 1.06 % decline, closing at 19,542.65. The markets continued to exhibit significant volatility, oscillating 338 points in the last week. The bearish trend was largely influenced by a global market sell-off. Equities, across the world, saw a decline amidst concerns of an escalation in the Middle East conflict, leading to higher prices for oil and gold.

The Nifty 50 remained range bound as strong call writing at 19,600 Strike and put writing 19,500 Strike, was witnessed. 19,500 remains a crucial support level for Nifty. A break of 19,500 levels can lead to the initiation of fresh shorts. A break below 43,500 in Bank Nifty will cause further selling while a close above 44,000 is required for the bulls to come back.

The weekly chart revealed a formation of a bearish inside bar, while on the daily time frame, the Index remained below the 50-day moving average (DMA). The Relative Strength Index (RSI) skewed negatively, ending at 57 levels on a weekly time frame. In the past week, several sectors witnessed profit booking and ended in negative territory. Notably, Nifty Auto was the only sector to post marginal gains.