Gold prices faced downward pressure throughout the week due to encouraging US economic data, with the upcoming focus on the Consumer Price Index (CPI) developments in the coming week. This resulted in gold experiencing its first weekly decline in three weeks. The US 10-year treasury note yield climbed towards 4.3%, supported by a surprising drop in US weekly jobless claims to their lowest level since February. Additionally, the ISM Services PMI for August 2023 unexpectedly surged to 54.5, indicating the strongest growth in the services sector in six months.
The Federal Reserve expressed concerns that this robust economic activity could lead to continued inflationary pressures, potentially necessitating further tightening. Moreover, the extension of the OPEC+ output cut led to a rise in oil prices, contributing to inflationary risks.
The US dollar index reached a six-month high of 105 levels, driven by dampened risk sentiment due to disappointing Services PMI reports from China and the Eurozone. In August 2023, the Eurozone Composite PMI was revised lower to 46.7, marking the most significant contraction in private sector activity since November 2020. Meanwhile, China’s Caixin Services PMI decreased from 54.1 in July to 51.8 in August, suggesting a waning economic recovery and undermining earlier optimism linked to government stimulus measures. Although China’s trade data for August surpassed forecasts, both exports and imports declined, reflecting weakened domestic and overseas demand.
Within the Federal Reserve, there exists a division concerning whether to implement one more interest rate hike, although most members agree that rates should remain elevated for an extended period. Cracks in this consensus are becoming increasingly apparent as the economic cycle approaches a turning point. Former Fed Bank of St. Louis President James Bullard advocated for pencilling in one additional hike this year, while Federal Reserve Cleveland President Loretta Mester hinted at the need for further rate increases, although without specifying the timing. Conversely, Fed Bank of Boston President Susan Collins emphasized the necessity for patience in evaluating economic data before deciding on further tightening measures. Federal Reserve Governor Christopher Waller expressed the view that policymakers can cautiously proceed with interest rate hikes, given recent data indicating a gradual easing of inflationary pressures.
In terms of investment demand, physically backed gold exchange-traded funds (ETFs) experienced net outflows for the third consecutive month, losing US$2.5 billion (46 tonnes) in August. During the Jackson Hole symposium, Fed Chair Powell reinforced the notion of “higher for longer rates,” reducing gold’s appeal as the opportunity cost of holding the precious metal increased. US benchmark treasury yields have risen for five consecutive months, hovering near an 11-month high, supported by a resilient US economy and growing expectations of a soft landing. Meanwhile, central banks collectively reported healthy net purchases of 55 tonnes in July, according to the World Gold Council. China and Poland added around 23 tonnes each, while Turkey added 17 tonnes.
Looking ahead, the upcoming week will bring a focus on US inflation figures, retail sales data, the ECB monetary policy meeting, and a range of Chinese economic data releases. The ECB is expected to announce its final rate hike next week. Bloomberg forecasts that headline CPI will marginally increase to 3.6% in August, while core inflation is expected to ease to 4.3%. While worries about increasing inflation could persist and bolster the US dollar, potentially leading to downward pressure on gold prices in the upcoming week, it’s worth noting that there’s a possibility of some short covering occurring in anticipation of the US CPI release.
(The author is Vice President-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)