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Precious metals like gold and silver, and new-age assets like Bitcoin, have had a strong run in the last month, but the rally has run into a roadblock amid expectations of a rate hike by the US Federal Reserve later this year. Gold prices are up 7.6 per cent in a month and silver 6 per cent (as of the September 3 close), according to spot market data available on MCX. Meanwhile, crypto token Bitcoin has rallied 26 per cent during the same period, reclaiming the $80,000 mark. The CME FedWatch tool signals that market participants are pricing in a 58 per cent chance of a hike, as against 45 per cent a month ago. Historically, these alternative assets have been vulnerable to a hawkish Fed stance. This is because higher interest rates typically push yields and the dollar index higher, increasing the opportunity cost of holding non-yielding assets. However, it might not hold this time amid an uncertain global environment, rising demand for other stores of value, and a likely risk of dollar debasement due to a rate hike. Manav Modi, commodities analyst at Motilal Oswal Financial Services, said that underlying demand remains supportive. Still, a hawkish Fed could remain an important resistance factor for both gold and silver in the near-term. That said, the current backdrop is quite different from previous hawkish Fed cycles. Central-bank demand remains strong, particularly from China. Till July this year, central banks' reported purchases have totalled around 130 tonnes of gold as they continued with their gold accumulation spree, according to a World Gold Council report. Meanwhile, geopolitical uncertainty continues to support gold. "The Dollar Index is stable for now but has not instilled any confidence among investors. This has increased attention towards ancient and new-age currencies. In this uncertain environment, there won’t be scarcity of buyers in gold or crypto," said Siddarth Bhamre, head of institutional research, Asit C Mehta Investment. Highlighting the adverse impact of a Fed rate hike on the US dollar, Apurva Sheth, head of market perspectives and research, SAMCO Securities, said that if the Fed hikes interest rates, then that will be detrimental to what the Treasury wants to do – keep yields under check and roll over $40 trillion debt at a lower interest rate. "Hence, debasing the dollar is the only option left. We believe that the dollar will continue to lose its purchasing power, and gold's attraction as a neutral currency and store of value is only going to rise. We believe gold could see levels of $7,000 in the next few years," said Sheth. In the crypto market, too, adoption and institutional participation are growing, and the market is becoming deeper and more resilient, providing structural support which could make any Fed-driven correction more of a cyclical phase than a fundamental shift, highlighted Balaji Srihari, VP - Business, India, CoinSwitch. "The near-term environment may remain challenging, but macro volatility does not necessarily change the longer-term trajectory." Disclaimer: Views and outlook shared belong to the respective brokerages/analysts and are not endorsed by Business Standard. Readers' discretion is advised.
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