Gold likely to remain rangebound with a bearish outlook next week

Highlights of the week ended August 4 included a huge surge in long-dated US yields and a US credit rating downgrade by Fitch. Long-term yields surged to fresh cycle high on increased auction borrowing sizes across the board.

Ten-year US yields rose to the highest level since October 2022 as the yields rose to 4.2043% before falling on the US non-farm payroll report released Friday.

Global rating agency Fitch, which had kept the US Government’s credit on a negative watchlist in May, downgraded the US government’s credit rating to AA+ from AA on anticipated fiscal deterioration over the next three years, a high and growing general government debt burden, social security concerns and governance issues.

The reaction so far is largely muted in the financial markets. The Biden Administration strongly opposed the rating agency’s move.

Another major development of the week was Saudi Arab extending its voluntary production cut of 1 mbpd into September with a possibility of deepening cuts. Crude oil has been on a tear on supply cuts announced by Russia and Saudi Arabia.

Elsewhere, China continued to announce more steps to stimulate its beleaguered economy and to support consumption. If the Chinese economy finds its footing, crude oil, and other industrial commodities will rise further, which may complicate the central banks’ task of reining in inflation.
Bank of England hiked rates by 25 bps, which was in line with expectations. The central bank will assess the incoming data to decide on its future course of its monetary policy.The US nonfarm payroll report for July was somewhat soft in terms of job additions as the US employers added 187K jobs in July as against the forecast of 200k jobs. The previous two months’ figure was revised lower by 49k. This year jobs added have been revised continuously lower for the first half of the year. Bright aspects of the monthly job report include the unemployment rate and earnings.

The unemployment rate in July slid to 3.50% from 3.60% in June, and was better than the forecast of 3.60%. Average hourly earnings rose quicker than expected in July. Average hourly earnings m-o-m rose by 0.40% Vs the forecast of 0.30%, while earnings on y-o-y basis at 4.40% beat the forecast of 4.20%.

On balance, it was a decent job report; however, the US Dollar slipped lower after the report as the yields dived lower. Two-year US yields fell 2.35%% Friday to end at 4.768%, while 10-year yields sank 3.29% to close at 4.042% on the last trading day of the week.

Weakness in the US Dollar index and rally in bonds helped gold rise Friday as it closed with a gain of 0.47% at $1942.90. The US dollar index was down 0.44% as it closed at 102.01.

Gold finished the week ending with a loss of 0.75%. Ten-year US yields gained 2.30%, while the two-year yields were down 2.35%. The US Dollar Index was up around 0.35% on the week.

Next week, investors will focus on the US CPI inflation (July), PPI (July), and University of Michigan consumer sentiment and inflation expectations (August preliminary).

Out of UK, the focus will be on monthly GDP (June) and 2Q (preliminary) readings. Among Euro-zone’s data, Germany’s CPI will be closely watched. China’s trade balance, CPI inflation, and new Yuan loans will also be released next week.

Gold fundamentals are not quite strong presently. As per the World Gold Council, gold buying by central banks in Q2 this year slowed down to 102.9 metric tons from last year’s 158.6 metric tons, though the central banks’ buying in the first half of 2023 amounted to 386.9 metric tons, which is still more than any January-June period buying going back to 2000.

Total known global gold ETF holdings have fallen for nine consecutive days through August 3. Gold may struggle to gain upward traction in the near term, though US yield volatility can influence the prices. The US Dollar Index may not fall much as the key central banks adopt a data-based approach for their future monetary policy decisions.

Support is at $1930/$1918/$1890; resistance is at $1965/$1975/$1987.

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