New Delhi: Strong likelihood of a sharp rise in interest rates by the US Fed and other central banks to rein in the red-hot inflation has melted international gold prices to a nearly one-year low. In India too, the prices of the yellow metal in physical markets fell to a multi-month low and breached the psychologically crucial level of Rs 50,000 per 10 gm.
One of the most important factors influencing the price of gold is the value of the dollar. A strong dollar normally leads to weak gold prices and vice versa. When the US Fed hikes interest rates, gold is negatively impacted because higher interest rates will increase the demand for dollar assets and make the dollar stronger. Higher interest rates also raise the cost of holding gold.
In its upcoming monetary policy meeting, the US central is likely to raise interest rates by 75 basis points to cool off four-decade high inflation in the country.
On Thursday, the European Central Bank (ECB) raised interest rates for the first time in more than 11 years to arrest inflation as the inflation print is well above the target.
Futures gold prices on Multi Commodity Exchange of India too fell in line with the global prices.
"Gold prices witnessed selling in the previous session on strong dollar and rally in equity indices. The growing speculation over the US Fed rate hike may keep bullion prices under check for the short term. The political problems in Europe have pushed the dollar index higher denting demand for gold," said Tapan Patel, Senior Analyst (Commodities), HDFC Securities.
Gold on the MCX is expected to trade in a range of Rs 49,600 and Rs. 50200 per 10 gram, said Patel.
"Gold's sharp slide in last few days has made it vulnerable to short covering and we may see extended gains as US dollar struggles however the generally upbeat outlook for US dollar remains unaffected to we may not see much upside in the metal," said Ravindra Rao, VP- Head Commodity Research at Kotak Securities.
Another factor putting downward pressure on gold is the import duty hike imposed by the government earlier this month.
The Central government had raised the import duty on gold from 10.75 per cent to 15.0 per cent. India is the second-largest consumer of gold, and it fulfils a major portion of its demand through imports.
The upward revision in the import duty was seen as a measure to disincentivize imports amidst the country's widening trade deficit -- meaning a difference between net imports and exports.