Gold benefitted from weakness in the US dollar, lower bond yields, increasing growth concerns, and ETF inflows however the rangebound movement shows that market players are still uncertain about the sustainability of the gains.
The US dollar index slumped to a 1-month low amid lower bond yields, disappointing US economic data, reduced safe-haven buying, and increased debate about Fed’s monetary policy stance.
FOMC minutes released this week showed that Fed officials support two more 50 basis points rate hikes in the coming months but believe that an aggressive set of moves will give them the flexibility to alter their stance if required.
FOMC minutes in light of disappointing US economic data and some cautious comments from Atlantic Fed President Raphael Bostic have fueled debate if the central bank may slow down the pace of monetary tightening in the coming months to avoid any major negative impact on the economy.
US economic data released this week disappointed. US Q1 GDP contracted more than previously estimated while housing and manufacturing data showed slower growth.
Disappointing economic data, China’s struggle to get the virus spread under control, and warnings from major leaders added to growth concerns increasing gold’s safe-haven allure.
The World Bank head warned that Russia’s invasion of Ukraine could cause a global recession amid rising food, energy, and fertilizer prices.
The IMF warned of a tough year ahead and declined to rule out a global recession. China
said the economy was in some respects faring worse than in 2020 when the pandemic first emerged and more need to be done to stabilize the economy.
US President Biden was more optimistic as he stated that a recession was not inevitable.
ETF buying also showed that investors are keen on holding on to the metal. Gold holdings with SPDR ETF have jumped to the highest level since early May near 1070 tonnes.
Gold’s gains were muted as other safe havens remained more attractive due to lower price. The Japanese Yen rose for the third consecutive week and tested a 5-week high against the US dollar. Yen hit a 2002 low earlier this month.
Swiss Franc rose for the second consecutive week and tested a 1-month high recovering further from 2019 low set earlier this month. The US 10-year bond yield slipped to mid-April lows, retreating from 2018 highs set this month, as bond-buying intensified.
Gold rise was also challenged by some recovery in equity markets. US DJIA index managed to close in the positive territory for the fourth consecutive sessions recovering from the March 2021 lows set last week.
Equity markets recovered amid the increasing debate that Fed may continue to raise interest rates aggressively.
Gold has paused after recent gains as market players are assessing if the recent rise can continue or not.
With the US dollar index well off the highs, increasing growth risks, renewed ETF, and persisting inflation concerns, gold prices may remain supported near the $1850/oz level.
China and Fed may remain in focus in the near term. With the increasing debate about Fed’s monetary stance, US non-farm payroll data due next week and comments from Fed officials may be keenly watched. China’s virus situation and manufacturing data will help form an outlook for the economy.
(The author is Associate Vice President – Commodity Research at Kotak Securities)
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