Gold Price: Yellow metal may see volatility with slightly downward bias this week

Spot gold closed with a loss of nearly 1.70% on the week as the metal closed at $1977.80 Friday.

Gold continues to be highly volatile on sharp moves in yields, shifting risk sentiments, and incessant reassessment of the Federal Reserve’s monetary policy path.

In a dramatic development on Friday, the US House Speaker Kevin McCarthy’s debt ceiling negotiating team members walked out of negotiations on a broad range of GOP’s budget-cutting demands.

Risk-on sentiments suffered due to this walkout. The schedule for the next meeting remains uncertain. The US debt ceiling impasse is yet to be resolved.

In his much-awaited speech at a Friday event, Federal Reserve Chair Powell said that the Central Bank might not need to hike rates as credit conditions have tightened, though he stressed at the policymakers’ commitment of bringing inflation down to 2% goal.

He cited uncertainty about the lagged effects of steep tightening done so far. In another major development, US Treasury Secretary Yellen said that more bank mergers may be required.
The US treasuries halted their ongoing sharp decline as yields recovered following the speeches of Ms Yellen and Mr Powell.Fading hope of a quick resolution of the debt ceiling impasse also helped gold and treasuries. The ten-year yields pulled back over 1% from the day’s peak.

Surging US Dollar Index followed the yields lower. Gold recovered sharply on the last trading day of the week on a retreat in yields and the US Dollar Index.

So far, the US macroeconomic releases of the week ending May 19 are concerned, and the data surprised mostly on the upside. US retail sales ex-auto and gas rose 0.60% in April Vs the forecast of 0.20%; retail sales control group data at 0.70% topped the forecast of 0.40%.

These core readings eclipsed the negative impact of headline retail sales falling short of forecast: headline retail sales advance rose 0.40% on the month Vs 0.80% forecast, though the prior reading was revised higher to -0.70% from -1%.

Similarly, industrial production was up 0.50% in April, which beat the estimate of 0%. NAHB housing Index in May came in at 50 Vs the estimate of 45.

A notable development on the data front was the US weekly jobless claims getting revised sharply lower by 22,000 from the prior week as fraudulent Massachusetts claims were reversed.

Continuing claims fell to the lowest level since the week ending on March 3. Inflated jobless claims in Massachusetts have made the US job market appear somewhat weaker than it actually is. The Philadelphia Fed business outlook data for May was noted at -10.40 Vs the estimate of -20.

Next week, investors’ focus will be on S&P Global US PMIs, new home sales, FOMC minutes of the May 2-3 FOMC meeting, Q1 GDP reading, personal income, personal spending, and PCE core deflator, which is Mr Powell’s preferred gauge of inflation.

It is worth noting that despite continued haggling over the debt ceiling issue and the possibility of a pause in a rate hike in June, ten-year US yields at 3.691% were up 1.08% Friday. The yields were up almost 7% on the week.

The two-year yields were also up about 7% on the week. It is a bearish development for gold. The US Dollar Index slipped 0.30% Friday, though it was up almost 0.30% on the weekly basis.

Gold volatility is going to continue amid a myriad of conflicting headlines and factors at play. The debt ceiling deadlock may continue for some time, which may provide some support to gold.

Further support is expected from an increased possibility of a pause in the Federal Reserve’s rate hike spree.

Nonetheless, US PMIs, GDP and PCE core deflator, and the performance of US regional banks will be crucial for the metal. Elevated yields are exerting downward pressure.

The coming week is going to be yet another week of high volatility in gold prices, though as such presently bears have the upper hand.

Support is at $1950 followed by $1930. Resistance comes at $2000/$2023/$2035.

(The author is Associate VP, Fundamental currencies and Commodities, Sharekhan by BNP Paribas)