Fed & Global CB rate hikes may affect gold prices negatively – First Capital Research Head

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To control inflation, Central Banks around the world are raising policy rates. Last week the Reserve Bank of India raised rates by 40 basis points and US Federal reserve raised rates by 50 basis points. Last week’s Fed rate hike is the highest since May 2000. Similarly, Central Bank of Sri Lanka raised rates by 700 basis points last month.

Fed is expected to further increase rates this year. “Fed rate hike could negatively affect gold prices,” stated Dimantha Mathew, Head of First Capital Research, a Colombo-based investment banking firm.  

He added “With the Fed rate hike, investors globally would sell gold and move towards to US treasuries. This would strengthen the US dollar and cause a decline in gold prices.”

In the case of Sri Lanka, its better to hold on to gold for some time, opined Mathew. “In the second half of the year, the exchange rate of Sri Lanka depends on political stability.”

It has to be noted that with rate hikes from CBSL, the difference between official and unofficial rates have narrowed to around
Rs 30 from Rs 200 around 45 days ago. The official exchange rate on Friday was Rs 374 per USD (selling), buying at Rs 361. The unofficial rates ranged from Rs 400 to Rs 420.

Mathew stated that once the official and unofficial rates become almost the same, there would be more remittance and exporters/ Importers would start using formal banking channels.

“With more inflows into formal banking channels, rupee could start appreciating to around Rs 300 by the end of the year. In Sri Lanka, the best time to sell gold, would be once the rupee starts appreciating. One should also consider the global gold price movements. However, the rupee stability depends on the political stability of the country,” noted Mathew.

Global gold price closed this week at USD 1,872. Sri Lanka went to Covid lockdown in March 2020, when the price of gold was USD 1,500 per ounce (31.1g). Mid March, 24k gold in Sri Lanka was Rs 72,000 per sovereign (8g). At present, 24K gold in Colombo is around 193,000. Since March 2020, the price of gold has risen around 25% in global markets in dollar terms, while in Sri Lanka, in rupee terms gold has increased around 160%, mainly due to the depreciation of the rupee. In the world market, the increase is a result of many factors like investors turning to gold as a safe investment  in periods of pandemic like Covid-19, and Central Bank buying.

By Rajiesh Seetharam