Domestic gold prices rise to record highs on a Fed pivot, US banking sector woes

Gold prices started the week on a negative note amid improved risk sentiments after JPMorgan Chase & Co. agreed to acquire First Republic after its collapse last month, making it the second-biggest bank failure in US history.

The government-led deal fueled optimism that the worst of the banking sector turmoil might be over, prompting a recovery in risky assets. The dollar index topped 102 levels after the ISM Manufacturing PMI in the US rose to 47.1 in April 2023, along with signs of elevated price pressures, as input costs rebounded in April.

However, renewed concerns about the strength of US regional banking stocks coupled with signs of weakness in the US Labour market and a Fed pivot prompted a rally in the yellow metal.

Meanwhile, data from the JOLTS showed that the number of job openings in the United States dropped by 384,000 to 9.6 million in March 2023, the lowest level since April 2021 and below the market’s expectation of 9.775 million, indicating that the labor market may be cooling off.

During the May FOMC meeting, the Fed raised the Fed funds rate by 25 bps to a range of 5% – 5.25%, marking the 10th increase and bringing borrowing costs to their highest level since September 2007.

The US Fed Chair Jerome Powell hinted the US central bank’s latest interest-rate increase could be the last one, but stopped short of declaring victory on its battle against rapid price increases. Despite the recent failure of First Republic Bank, Powell acknowledged that banking conditions have “broadly improved” since March.

Powell also said that the Fed can’t protect the US economy from a debt ceiling default. MCX Gold prices rose to a record high of Rs.61,845 per 10 gram on 4th May, amid safe-haven bids and due to a fall in US treasury yields.According to the latest World Gold Council report, Q1 gold demand (excluding OTC) was 13% lower year on year at 1,081 tonnes, with a negative contribution from ETFs.

Gold demand from central banks fell to 228.4 tons in the first quarter of 2023, down almost 40% from the previous quarter and marking the second straight quarter of decline in the central bank activity. Indian demand fell sharply as domestic local gold prices rose to record highs.

We are probably at peak Fed funds rate and might see a pause during the June FOMC meeting, which is a major trigger for bullions. US banking sector woes are far from over. Amid the current financial turmoil, swaps are pricing in almost 80 basis points rate cut this year.

Bloomberg forecasts the US Unemployment rate to tick higher to 3.6%, and non-farm payrolls to plunge to 181 thousand in April. If confirmed by official data, will be the lowest job addition since January 2021. US CPI data will be in focus for the coming week.

On the price action front COMEX Gold needs to take out the identical triple top resistance near $2090/troy ounce. If that happens the bulls might target $2150/troy ounce. However, if the bulls fail in taking out the resistance then corrective dips might attract buying.

(The author is VP-Head Commodity Research at Kotak Securities Limited)

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