Gold falls over 3% in a week; yellow metal staring at $1830 as bears take control

Gold prices exhibited extreme volatility in the week ending February 3 as traders had to wade through the deluge of starkly contrasting developments and data that swung the pendulum to extremes before the dust finally settled in favor of bears.

Seemingly dovish Federal Reserve, as it failed to sound convincingly hawkish at the FOMC meeting concluded on February 1, sent the yellow metal to a new cyclical high of $1959 (spot) as the 10-year US yields tumbled to a fresh cyclical low of 3.33%, which in turn pushed the US Dollar to a fresh cyclical low of 100.57.

Dollar sank on the traders’ notion that the European Central Bank and Bank of England would hike the rates much more than the Federal Reserve would as the US Central Bank nears its terminal rate.

This notion had played a great role in pushing the Greenback sharply lower in the last few months. However, this speculation of incremental differential rates working against the Dollar was sabotaged by the ECB and the BoE as these two Central Banks, as per their respective pressers after their monetary policy decisions, seemed to indicate that even their terminal rates were well in sight.

That revived the moribund US Dollar, which weighed heavily on the yellow metal.

The US nonfarm payroll report for the month of January proved to be a bolt out from the blue as the monthly job report turned out to be exceptionally strong.

The US employers added 517k jobs in May as against the expectation of 188k jobs as previous months’ readings were revised sharply higher. The unemployment rate fell to 3.40% — a fifty-four-year low– as against the forecast of 3.60%, while average hourly earnings on a y-o-y basis topped the forecast.

Although much of the headline figure of jobs added is due to updation of population controls and seasonal adjustments, the markets have been spooked by the job report.

The ten-year US yields jumped by 3.45% to end the week at 3.519%. Downside pressure on gold multiplied as the US ISM services data came in at 55.20, way above the median forecast of 50.50, thus proving that disastrous December reading to be an anomaly.

Gold finished the week at $1865 with a whooping loss of 3.30%.

Stellar US data, the IMF turning a bit optimistic about the global economy in 2023; European Central Bank calling risks to the Euro-zone economy as balanced; and increased probability of a soft landing of the US economy after encouraging GDP, ISM non-manufacturing and nonfarm payroll report are likely to keep the metal under pressure.

Gold may decline to $1830 in the near term. Resistance is at $1900/$1920.

(The author is AVP, Fundamental currencies and Commodities analyst at Sharekhan by

)

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