COMEX Gold prices are poised for the first weekly loss in three, after touching a near record high of $2,085.4 per troy ounce in the previous week. The yellow metal edged higher at the start of the week, as the latest SLOOS survey showed that Q1 credit standards tightened.
The Federal Reserve said banks reported tighter standards and weaker demand for loans in the first quarter, extending a trend that began before recent stresses in the banking sector emerged. The proportion of US banks tightening terms on commercial and industrial loans for medium and large businesses rose to 46%, up from 44.8% in the fourth quarter of 2022.
Uncertainty over the US debt ceiling crisis provided further support as the meeting between President Joe Biden and congressional Republicans made little tangible progress towards averting an US default.
Meanwhile, Federal Reserve Bank of New York President John Williams said he is monitoring how strains in the banking sector affect the US economy and left the door open to leaving interest rates on hold next month, with a lot of economic data between now and then.
On the economic data front, US CPI released this week showed that the annual inflation rate in the US unexpectedly edged lower to 4.9% in April. Decline in energy prices and used cars and trucks coupled with an ease in food prices helped to bring the inflation below 5%.
Also, shelter cost, which accounts for over 30% of the total CPI basket, slowed for the first time in two years. The core CPI also edged lower to 5.5% in April, from 5.6% in March, still remains sticky. The take here is that the key drivers of underlying US price pressures began receding in April.
Rent increases were smaller than over the last year on average, and services prices excluding housing and energy, a category the Federal Reserve is closely watching, posted the smallest advance since last summer, according to a Bureau of Labor Statistics.Despite an ease in the US CPI, bullions came under pressure, as the dollar index surged above 102 levels on the back of hawkish Fed and optimism on the debt ceiling front.
Governor Michelle Bowman said that the Federal Reserve will likely need to raise interest rates further and hold them higher for some time if US price pressures don’t cool off and the jobs market shows no sign of slowing.
The delay in meeting between President Joe Biden and House Speaker Kevin McCarthy reflects progress in staff-level discussions, according to people familiar with the talks.
The most recent data from World Gold Council showed that ETF inflows continued for a second month in April, amid concerns on the strength of the US banking sector coupled with a looming recession, prompting investors to allocate more towards the safe haven yellow metal.
ETFs might continue to see inflows in the coming months, as Fed might pause in the coming meeting, with rate cuts expected by year-end.
Heightened chance of recession means a greater chance that inflation falls more quickly, which might eventually lead to Fed cutting rates.
Currently, the market is pricing in almost 75 basis points rate cuts by the year-end. We expect the Fed to pause rates in June, till September and cut rates in November and December.
Gold has always fared well during the past rate cuts. With an incoming recession, US debt ceiling uncertainty, heightened geo-political tensions and a Fed pause in June, gold prices might stay buoyed.
US, Retail sales, housing data and Powell’s speech will be in focus for the coming week. On the price action front we maintain that the triple top in COMEX Gold near $2090/troy ounce needs to be taken out on a closing basis if the bulls have to take the prices higher. Support remains at $1974/troy ounce.
(The author is VP-Head Commodity Research, Kotak Securities)
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