CHENNAI: Gold prices experienced a slight gain after Fitch downgraded the credit rating of the US government, said a senior official from Geojit Financial Services.

"Following Fitch's credit rating downgrade of the US government, gold prices showed a slight increase. Economic uncertainties and dollar volatility usually have a significant impact on the price and demand for gold as it is considered a safe-haven asset. The rating downgrade of the world's largest economy prompts investors to seek refuge in relatively safer assets like bullion," said Hareesh V, Head of Commodities at Geojit Financial Services.

However, Quantum Asset Management Company (AMC) predicts a structural upswing in gold prices due to a policy rate cut by the US Federal Reserve and higher-than-average inflation.

In its report on the outlook for gold in August, Quantum AMC stated: "Over the medium term, despite the 'higher for longer' rhetoric, lower inflation along with a slowdown in US growth should lead the Fed to cut rates sooner than it currently states. A rate cut combined with higher-than-average inflation will result in a structural up move in gold prices."

Reviewing the past, the report mentioned that gold began July on a subdued note, trading near $1900 per ounce levels, influenced by the US Federal Reserve's hawkish hold in June. However, prices gradually increased during the month as investors continued to bet on one final interest rate hike in July.

According to the report, the probability of the Fed raising its benchmark rate by 25 basis points to a range of 5.25%-5.50% in July was above 90% for most of the month, based on Interest Rate Futures.

International gold prices concluded the month of July about 2.7% higher, while domestic prices rose by about 2.9%. Nonetheless, there was some volatility along the way, as reported by Quantum AMC.

During the July meeting, the American central bank raised interest rates to a 22-year high. However, gold markets remained firm at $1975 per ounce levels, considering that the 25-basis point move was largely expected and the meeting was perceived as less hawkish than the one in June when Chairman Jerome Powell alluded to two more rate hikes in 2023. Interest rate futures post the Federal Open Market Committee (FOMC) meeting continue to anticipate rates peaking at this level.

The report suggests that further easing in the monthly core inflation numbers for July and August could potentially mark this as the last rate hike in this tightening cycle. Conversely, any negative surprises on the inflation front might lead to more rate hikes. Powell has ruled out any rate cuts in 2023, capping the upside potential in gold, the report added.

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