Gold remains vulnerable as safe-haven demand missing

Highlights of the week ended June 30 include views and opinions of the key central bankers at ECB forum held from June 27 to June 28 in Sintra, Portugal.

Market participants keenly watched a panel discussion involving Federal Reserve Chair Powell, Bank of England Governor Bailey, ECB’s President Lagarde and Bank of Japan’s Governor Ueda wherein these leaders discussed the economy, interest rates and their respective outlooks.

The key takeaways from their discussions and views are that except Bank of Japan, the rest of the three central bankers deem inflation to be way above their respective target levels. Inflation control is their priority and they will continue to remain hawkish to quell the inflationary pressure.

Federal Reserve Chair Powell said that the US economy is resilient, and a downturn is not the most likely case. He added that the Federal Reserve needs to hike twice more. The Bank won’t hesitate to hike rates in consecutive meetings, too, he said.

He highlighted that the US job market needs to loosen further to bring inflation lower. Lagarde didn’t sound much positive on the economic outlook of the Euro-zone though.

Bank of Japan’s Governor Ueda defended the ultra-accommodative stance of the Bank. Federal Reserve Chairman Powell repeated his message of the possibility of two or more rate hikes in his speech at the fourth Conference on Financial Stability hosted by the Bank of Spain on June 29. The US Dollar was boosted by these hawkish comments from Jerome Powell.
Another major development of the week was continuing weakness in the Chinese Yuan, which fell to a seven-month low against the US Dollar as it became the worst-performing Asian currency last month.The currency tumbled 5% in the second quarter as China’s economy continues to struggle amid a lack of any major stimulus.

China’s economy continues to show signs of weakness as the country’s manufacturing sector contracted for the third straight month in June and the rate of expansion in the non-manufacturing sector slowed down.

Last but not least, US yields surged sharply higher to their mid-March levels on hawkish Federal Reserve and upward revision in the US Q1 GDP coupled with a sharp decline in the US weekly jobless claims. The annualized Q1 US GDP was revised higher to 2% from the previous reading of 1.30%.

The US consumer spending increased 0.10% in May on an MoM basis versus the forecast of an increase of 0.20% as April spending was revised lower from 0.80% to 0.60%. Real personal spending was flat in May, thus falling short of the forecast of a 0.10% rise, while April data was revised lower to 0.20% from 0.50%.

Core PCE deflator, the Fed’s preferred gauge of inflation, was up 4.60% on the YoY basis as against the forecast of 4.70%, which boosted the markets on the last trading day of the week.

The struggling Chinese economy, weak Yuan, hawkish Federal Reserve, rallying risk assets, decent US data, and consequently buoyant yields are bearish for the yellow metal. In addition, global gold ETFs have recorded net outflows in nineteen out of the last twenty days.

Spot gold fell around 2.50% in the second quarter.

Two-year US yields at 4.904%% were up 3.10% on the week, while ten-year yields closed with a weekly gain of about 3% at 3.841%.

The US Dollar index finished the week almost unchanged at 102.92 as risk appetite improved on the last trading day of the week/month/quarter, which dragged the index around 0.40% lower from its previous day’s closing level.

Next week, investors will focus on services and manufacturing PMI data out of Eurozone, the UK, and the US. Apart from these major economic indicators, US nonfarm payroll report for June will be closely watched.

The yellow metal looks vulnerable to further decline in the near term as safe haven aspect of the demand has almost dried up amid rising yields and reduced banking concerns. Gold is trading just like any other metal.

Support for the metal is seen at $1893/$1870. Resistance is in $1940-$1950 zone.

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