Gold’s journey remains uncertain, with market attention turning toward the forthcoming US jobs data. This week, COMEX Gold prices saw an uptick, marking their first weekly gain in four weeks, even amid a significant surge in the US dollar.
Previously, spot gold prices had dipped below the critical $1,900 per troy ounce threshold due to various factors, including US retail sales data and somewhat hawkish Federal Open Market Committee (FOMC) meeting minutes. These minutes had hinted at potential inflation risks, suggesting the need for further interest rate actions.
However, a shift occurred when the US flash PMI data for August was released, revealing that business activity had nearly stalled. The S&P Global US Services PMI fell to 51 in August 2023 from 52.3 in the previous month, and the Manufacturing PMI dropped to 47 in August from 49 in July. This prompted swaps traders to reconsider their bets on additional monetary tightening by the Federal Reserve, leading to an upswing in gold prices.
In a highly anticipated speech at the Jackson Hole symposium, Fed Chair Jerome Powell acknowledged the progress in alleviating inflation from last year’s peak. Nevertheless, he cautioned that inflation still remained “too high,” implying that interest rates could stay elevated for an extended period and leave room for more rate hikes. Powell also stressed that policy would continue to be restrictive until inflation steadily declined toward its 2% target. The Fed had raised its benchmark interest rate to a range of 5.25% to 5.5% the previous month, marking the highest level in 22 years. As expected, Powell emphasised that economic growth and labor market conditions would be closely monitored when making policy decisions.
Now, the focus is shifting from terminal rates to the duration expecting rates to remain elevated. Simultaneously, disagreements among members have started to surface as inflation cools, with the July minutes revealing that two officials supported leaving rates unchanged.
The SPDR gold ETF’s holdings have dwindled for the fifth consecutive week as the yield on the 10-year TIPS (a gauge for real rates) surged toward a 14-year high of 2%. This increase raised the opportunity cost of holding gold, which in turn prompted outflows from gold-backed ETFs. This trend is likely to persist until investors are convinced that rates have reached their peak.
Strong central bank purchases have provided support to global gold demand over recent quarters, a testament to heightened geopolitical tensions and macroeconomic uncertainties.With ongoing strength in labor-market indicators and consumer spending, policymakers may remain uneasy about the prospects for easing inflation. Next week, a slew of labor market indicators from the US may assist the market in shaping expectations ahead of the Fed’s policy meeting on September 20th.
In terms of price action, COMEX Gold recorded a 1.30% increase in the previous week after finding support near the $1,908 per troy ounce level. However, the price is currently encountering resistance at around $1,953 per troy ounce, which coincides with the 60-day moving average (DMA) resistance. For the bulls to take control and drive the price higher, they will need to overcome this 60 DMA resistance on a daily closing basis. Failing to do so may result in price consolidation within the $1950-$1915 per troy ounce range.
(The author is VP-Head Commodity Research at Kotak securities limited)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)