Gold gains sharply on anticipation of hefty Fed rate cut next year

The week ending December 1 was marked by speeches of two important Federal Reserve officials – Waller, the Federal Reserve Governor and Powell, the Federal Reserve’s Chair. Financial markets construed the much awaited Powell‘s speech Friday as decisively dovish as he did not seem to push hard against the markets’ expectations of hefty rate cuts next year. Powell, in his speech at Spelman College, said that the Federal Reserve’s monetary policy is in a restrictive territory and it is too early to time the Fed rate cuts.

He added that if appropriate, they are ready to hike rates further. He was optimistic on consumer spending. Markets interpreted his remarks to be a clear indication that the Fed is done with hiking rates.

It is to be noted that Waller, a known monetary policy hawk, said earlier in the week that the Federal Reserve’s monetary policy is well positioned to slow the economy and get inflation back to 2%. He mentioned a possibility of lowering policy rates should inflation fall for several months. Seemingly dovish statements from the duo continued to push the yields and Dollar Index lower, which has fuelled rallies in almost all the asset classes.

COMEX gold futures settled at a record high Friday as spot gold was just shy of all-time high of $1976.

The two-year US yields fell to the lowest level since mid-June on Powell’s remarks as the ten-year US yields slumped to the fresh cycle low. Bond rally was fuelled further by US ISM manufacturing PMI data (November) coming in at 46.70 Vs the forecast of 47.80, which showed that manufacturing activity contracted for the thirteenth straight month, the worst stretch in the last two decades.

Spot gold closed with a gain of 1.79% to settle at $2072.12 Friday. The yellow metal has rallied 14% since it’s October low. Gold was up around 3.50% on the week. The ten-year US yields fell 2.80% to 4.208% Friday as the two-year yields fell 3% to 4.55% Friday. The yields tens and twos were down 6% and 8% respectively on the week. The US Dollar Index slid 0.39% to 103.12 Friday. It was down merely 0.20% on the week despite a sharp decline in the US yields.
The US data released earlier in the week showed that the US GDP rose at an upwardly revised 5.2% annualized pace in the third quarter, the fastest in nearly two years; however, consumer spending advanced at a 3.6% rate that trailed the forecast of 4%. The personal consumption expenditures price index was revised lower to a 2.8% annual rate in the third quarter. The Beige book showed that the US economic activity is slowing down.Major US data to be released next week include factory orders (October), durable goods orders (October final), US services PMI (November), JOLTs job openings (October), ADP employment change (November), unit labour cost (3Q final), and nonfarm payroll (November). Out of Europe, Germany’s trade balance (October), factory orders (October) services and composite PMI (November final), industrial production, CPI inflation (November final); and the Euro-zone’s services and composite PMIs, PPI inflation (October), retail sales (October), employment (3Q final) and GDP (3Q final) will be of prime importance. Traders will look at Japan’s services and composite PMIs (November), Tokyo CPI inflation (November), 3Q final GDP; and China’s services and composite PMIs (November) data, too.

Total known global gold ETF holdings fell for the fourth straight day through November 30, thus resulting in a decline of nearly 0.55 Million Troy ounces in the first four days of the week.

Presently, markets are looking for five rate cuts next year. Going by the comments of the Federal Reserve officials and momentum in the bonds, the ten-year US yields may slide to 4%, which may help gold rise to record high of $2100 in the near-term. Nonetheless, strong US nonfarm payroll may easily upset the rate cut odds, which may lead to a sharp correction. Gold valuation is quite stretched presently.

Support is at $2050/$2030. Interim resistance is at $2080. Above the $2100 mark, bulls will set their eyes on $2200.

(The author is Associate Vice President, Fundamental Currencies and Commodities at Sharekhan by BNP Paribas)

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