COMEX Gold prices declined for the second consecutive week as both the dollar index and US benchmark treasury yields rose.
Concerns about the US banking sector’s health and weak Chinese economic data led to a haven shift towards the dollar.
Moody’s Investors Service downgraded several American lenders, signalling potential concerns for a handful of larger firms.
China’s disappointing exports and imports added to worries about the world’s second-largest economy, further boosting the dollar.
Additionally, 10-year treasury yields increased due to heightened bond issuance by the government, hampering any potential upward movement in gold prices.
On another note, China continued the trend of increasing gold reserves, adding around 23 tons in July. Central bank purchases have provided substantial support for gold demand, albeit at a slower pace compared to record purchases seen in 2022.
Undoubtedly, the week’s key economic event was the US Consumer Price Index (CPI) release, following a mixed Labor report the prior week.The data, indicating a slight reduction in US inflation, offered some relief and reinforced the idea that the Fed might consider a pause in September. The figures were largely as expected, with headline inflation ticking up slightly to 3.2%, while core CPI eased to 4.7% in July. This marked the end of 12 consecutive months of declines in headline CPI since its peak of 9.1% in June 2022.
The moderation in core CPI signified the smallest month-to-month gains over two years. The super core CPI, excluding housing and energy services, also showed moderation at 0.2%.
The primary contributor was housing costs, with owners’ equivalent rent rising 0.5% month-to-month and 7.7% year-over-year. It’s expected that this rise will ease by year-end due to delays in observed rent changes. Despite these changes, the dollar index remained high, and treasury yields increased due to expectations that the US would avoid a recession, keeping interest rates higher for a longer time.
Statements from the Fed officials during the week were mixed. However, there was a general consensus for prolonged higher rates.
In the upcoming week, attention will be on a range of Chinese data, US Retail Sales figures, and the release of the FOMC meeting minutes.
The July FOMC meeting had a slightly dovish stance, so the minutes may reveal that most Fed officials viewed the progress on reducing inflation favorably while remaining uncertain if the rate hike cycle has concluded.
It’s anticipated that gold prices might experience some recovery based on these dovish meeting minutes, though any upward movement could be limited.
The improved outlook for US inflation suggests that the US might evade a recession, which could dampen gold’s role as a traditional safe-haven asset in times of economic uncertainty.
The US economy’s resilience also allows the Fed to maintain higher rates until inflation aligns with the 2% target. The weaker sentiments from China and Europe continue to support the strength of the dollar.
To sustain a meaningful increase in gold prices, signs of a slowdown in the US economy would be necessary to weaken the dollar.
(The author is VP-Head Commodity Research, Kotak Securities Ltd)
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