Risk sentiment improved after Bank of Japan Deputy Governor Uchida said there would be no rate hikes in the near term amid weak markets. United States Federal Reserve Officials downplayed a weaker-than-expected US non-farm payrolls report (July) and encouraging US data also helped risk assets rally. Spot gold closed with a 0.18% gain at $2431 on Friday, although it was down nearly 0.50% in terms of weekly close.
US bond yields and dollar index
US ten-year yields seesawed sharply during the week as yields fell to 3.67% on August 5, the lowest level in over a year, on the back of disappointing US non-farm payrolls report and market turmoil as the Japanese yen rallied to its highest level this year, prompting unwinding of yen carry trades, although the Japanese currency retreated nearly 4% from its cycle low around 141 on positive US ISM services data and dovish stances from central bank officials.
The US 2-10 year yield curve virtually uninverted this week for the first time since July 2022, the longest inversion period, as investors began to worry about the possibility of a US recession.
Ten-year US yields closed almost 4.50% higher on the week at 3.94%, while yields fell around 1.25% on Friday. US Dollar The index closed down around 0.13% at 103.15 and was down around 0.05% for the week.
Data summary
The US ISM Services PMI (July) rose to 51.40 (51 forecast) from a more than four-year low of 48.80 recorded in June. Prices, employment and new orders improved as employment returned to the expansion zone, dispelling some of the pessimism around the US nonfarm payrolls report. It also calls into question the extremely weak US monthly report. US weekly jobless claims in the week ended August 3 fell to 233,000 from 250,000, the fastest pace in a year, although continuing claims in the week ended July 27 rose to 1,875,000 from 1,869,000, a thirty-three-month high.
China’s July inflation data was released on Friday. The CPI inflation index rose 0.5% year-on-year (forecast 0.30%, previous 0.20%) due to rising food prices and seasonal factors. China’s PPI stood at -0.80% year-on-year (forecast -0.90%, previous -0.80%). However, the PPI inflation index has remained negative since October 2022.
Central Bank Action
For the third consecutive month, China has refrained from buying in July. The People’s Bank of China held 72.80 million ounces of gold at the end of July, which is almost 5% of its foreign exchange reserves. This is a negative development for the metal.
ETF Demand/India
Total known holdings of global gold ETFs, after rising for three consecutive days, fell sharply from 82,736 MOz on 7 August to 82,164 MOz, which is lower than last week’s level of 82,458 MOz.
According to the World Gold Council, India’s gold demand in 2024 is expected to be around 750 tonnes, which is comparable to the 2023 demand of 761 tonnes.
Upcoming data
After a quiet week, the week ahead will be packed with data, with the release of US CPI (July), Retail Sales Advance (July), Philly Fed Business Outlook (August) and Industrial Production data (July). As the Chinese economy remains in focus, investors will also be keeping a close eye on China’s housing price, retail sales, industrial production and property investment data (all July), due next week.
Perspective
Gold’s strength is mainly based on the US Federal Reserve’s rate cut expectations as concerns about a possible US recession in the coming quarters due to the weakening US labor market keep yields low. However, weak US ten- and twenty-year bond auctions this week cast doubt on the high probability of a US recession in the near term. Nevertheless, traders are expected to buy on dips ahead of US CPI inflation and advance retail sales data next week. The upcoming Jackson Hole Symposium on August 22-24 will also keep traders hopeful as they await crucial clues on rate cuts from Federal Reserve Chairman Powell. This is due to the fact that in retrospect, it seems that the Federal Reserve missed a good opportunity to begin rate cuts at its FOMC meeting that concluded on July 31. The metal is expected to find strong buying support on dips, although weak Chinese demand is a bearish factor.
Moderate US inflation and weak retail sales data will help the metal extend its recovery.
Support is at $2413/$2400/$2379/$2370. Resistance is at $2450/$2458/$2478/$2485.
(The author is Associate Vice President of Fundamental Currencies and Commodities at Sharekhan of BNP Paribas)
(Disclaimer: The recommendations, suggestions, views and opinions of the experts are their own and do not represent the views of Economic Times)
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