COMEX Gold prices are poised for the fourth consecutive weekly decline and are hovering near four-month lows, weighed down by higher treasury yields and steady greenback.
The yellow metal started the week on a positive note, after the ISM Manufacturing PMI in the United States fell to 46 in June 2023, from 46.9 in May and below forecasts of 47.
The reading pointed to a faster rate of contraction in the manufacturing sector since May 2020, with companies managing outputs down as softness continues and optimism about the second half of 2023 weakening.
A slowdown in the manufacturing sector raised economic concerns and aided gold prices. However, minutes of the June Fed policy meeting showed that almost all participants judged it appropriate to leave the fed funds rate steady in June, as it would allow them more time to assess the economy’s progress toward maximum employment and price stability.
Still, some members favored raising rates by 25 bps. All officials continued to anticipate that, with inflation still well above the 2% goal and the labor market remaining very tight, maintaining a restrictive stance would be appropriate, and almost all saw the need to raise borrowing costs again this year.
Last week, Fed Chair Powell reinforced that interest rates will continue to rise this year and telegraphed two more quarter point hikes.
What really surprised markets was the ISM Services PMI and the ADP employment data released during the second half of the week.The ISM Services PMI unexpectedly jumped to 53.9 in June of 2023, pointing to the strongest growth in the services sector in four months, and well above expectations of 51.
Meanwhile, latest report from ADP national employment for June reported a 497K increase in US jobs, the most since February 2022 and exceeding forecasts of 228K while employers announced the least job cuts since October, and continuing claims fell to the lowest in four months.
Even though the data failed to boost the greenback, the yields on the 10 year and 2-year notes rose above 4% and 5% respectively, raising the opportunity cost for holding the non-yielding bullions.
On the investment demand front, the SPDR gold ETF holdings stood at 917.86 tonnes as on 6th July, compared with 921.9 tonnes during the previous week. Higher yields prompted outflows from bullion backed ETFs.
According to a recent World Gold Council(WGC) report, June saw outflows of US$3.7bn (-56t) from global gold ETFs, resulting in H1 net disinvestment (-US2.7$bn, -50t).
In the mid-year outlook released this week, the WGC expects gold to remain supported on the back of rangebound bond yields and a weaker dollar.
The report also said that gold might experience strong investment demand if economic conditions deteriorate, while a soft landing or much tighter monetary policy could result in disinvestment.
According to the CME Fed Watch tool, the odds of a July hike stands at 90%. Markets have now started to price in a second quarter point hike in 2023, during September or November.
Investors await the official NFP data, which is expected to show job additions of around 230K and an ease in unemployment rate to 3.6%. US CPI data will be in focus for the coming week, which is going to be the major data ahead of the FOMC meeting on 26th July.
Any signs of elevated core CPI might continue to bolster the expectations for further rate hikes and lead to higher treasury yields. We expect gold prices to remain sideways unless US economic activity deteriorates sharply.
(The author is VP-Head Commodity Research, Kotak Securities Ltd)
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