COMEX Gold prices started the week on a negative note, plunging almost 2.5% in the first two days. The yellow metal approached an eleven-week low of $1,810.8 per troy ounce notched in the previous week, as Fed chair Jerome Powell unveiled a hawkish tilt.
During the congressional testimony, Fed chair Jerome Powell said that the central bank is prepared to increase the pace of rate hikes, if the totality of the data were to indicate that faster tightening is warranted.
Powell also noted that the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.
Markets took Powell earnestly and the dollar index surged to a three month high of 105.88 levels, while US two-year treasury yields, a proxy for short-term rates, skyrocketed to a fresh 15 year high of 5.08%.
Interest rate futures started pricing in fed funds terminal rate at 5.66% by September 2023 and almost zero rate cuts for the year.
Probability for a 50 bps rate hike in the March FOMC meeting rose to 55.7%, on 10th March compared to 9.2% a month ago, according to CME Fedwatch tool. Higher rates dampens the appeal for the non-yielding bullions
US ADP employment data showed that private businesses in the US unexpectedly created 242K jobs in February of 2023, well above an upwardly revised 119K in January and market forecasts of 200K.Whereas, Chinese trade data released earlier in the week revealed that exports for the January-February period fell, pointing to continued weakness in foreign demand and backing government concerns that a global slowdown will hamper the country’s recovery.
Both exports and imports plunged 6.8% and 10.2% respectively, partially bolstering the greenback.
However, gold prices rebounded sharply on Thursday, after the weekly jobless claims came higher than anticipation, softening the expectations ahead of the Non-farm payrolls on Friday.
Data showed that the weekly jobless claims jumped by 21,000 from the previous week to 211,000 in the week ended 4th March, the most since December 2022 and well above market expectations of 195,000.
Investors also sought the safety of bonds as jitters over a rout in US bank stocks hit risk sentiment, aiding the safe haven gold. US two-year treasury yields fell 20 bps on Thursday and almost another 10 bps on Friday, on concerns of trouble in US banking sector.
Silicon Valley-based lender SVB Financial Group was at the center of the storm on Thursday, losing 60% of value, after taking steps to shore up its capital position, stoking concern that soaring interest rates are weighing on balance sheets.
According to the World Gold Council, global physically backed gold ETFs witnessed another month of outflows, losing US$1.7bn (-34t, -1.0%) in February.
Still, central bank buying is supporting prices. Singapore boosted its gold reserves by about 30% in January, joining central banks from China to Turkey in building up holdings of the precious metal.
The Monetary Authority of Singapore’s bullion reserves rose to 6.4 million fine troy ounces, or 199 tons, at the end of January, up from 4.9 million ounces a month earlier, according to Bloomberg.
China increased its gold reserves for a fourth straight month in February, while Turkey was the biggest buyer of the precious metal among central banks last year.
Investors are now focused on the February non-farm payrolls print, which is expected to show the US economy created 224K jobs, the least since December 2020, after a 517K growth in January.
Half a million jobs were added according to the January employment report, as favorable seasonal adjustment provided a boost. February Jobs data is likely to revert to the 200k average, with downside risks.
We might see a rebound in gold prices in the event of any signs of weakness in the US labour market.
(The author, Ravindra V.Rao, is VP-Head Commodity Research at Kotak Securities Ltd)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)