Gold prices witness steepest weekly decline in 6 weeks, focus shifts to US CPI ahead

COMEX Gold prices are on track for their most significant weekly decline in six weeks, driven by a sell-off in the longer end of the US treasuries and positive US economic data. This situation is potentially putting pressure on the Federal Reserve to maintain its rate hike trajectory.

The yield on 10-year US treasuries has risen nearly 23 basis points this week, coming close to a 16-year high seen in October 2022. This increase raises the opportunity cost of holding non-yielding assets like gold.

The surge in treasury sales to cover larger deficits in the US, along with Fitch Ratings downgrading US sovereign debt, has further contributed to the upward pressure on yields.

Fitch’s downgrade of US sovereign debt to AA+ from AAA has echoed a similar move by S&P Global over a decade ago. The downgrade is attributed to projected fiscal deterioration, a significant and growing government debt burden, and governance erosion relative to ‘AA’ and ‘AAA-rated peers over the past two decades.

The dollar index has seen its third consecutive weekly increase, rising by almost 1% prior to Friday, driven by robust ADP jobs data. However, Friday’s highly anticipated non-farm payrolls (NFP) data showed mixed signals.

While the unemployment rate and job additions fell more than expected, average hourly earnings saw a stronger-than-expected increase. This triggered profit-taking in the greenback, which in turn supported gold at lower levels.
The greenback experienced a rapid decline in response to the lower NFP numbers, although the data still underscores a strong labor market historically, reinforcing the Fed’s case for higher interest rates.Other data points revealed a decline of 34,000 job openings in June 2023, reaching the lowest level since April 2021, along with a more significant drop than anticipated in the ISM Manufacturing PMI to 46.8 in July.

The US ISM Services PMI also retreated to 52.7 in July from a four-month peak of 53.9 in June, largely due to smaller increases in business activity/production, new orders, and employment.

The World Gold Council’s quarterly report for Q2 2023 highlighted that despite softer central bank demand, gold demand remained steady.

Q2 gold demand (excluding OTC) slightly decreased by 2% year-on-year (YoY) to 921 tonnes, mainly due to a notable slowdown in net central bank purchases compared to above-average acquisitions in Q2 2022.

Although there were sales from Turkey in response to specific local market conditions, there was a net official sector purchase of 103 tonnes in Q2. Jewelry consumption showed a modest improvement despite the elevated gold price environment, rising 3% YoY to 476 tonnes.

Bar and coin investment increased by 6% YoY to 277 tonnes in Q2, with Turkey playing a significant role in driving this growth. Conversely, ETFs experienced net outflows of 21 tonnes, influenced by higher yields and the markets’ resistance against anticipated Fed rate cuts in 2024.

Looking ahead, attention is likely to shift to the US Consumer Price Index (CPI) data scheduled for the following week. Expectations of moderating inflation have led investors to adjust their rate hike projections for September, causing uncertainty regarding future Fed meetings.

Preliminary forecasts from Bloomberg indicate that US CPI is anticipated to tick up to 3.3% YoY, while core CPI is expected to remain stable at 4.8% in July.

An increase in inflation might bolster expectations for a September rate hike, potentially boosting the greenback and continuing to weigh down gold prices in the upcoming week. Additionally, speeches by several Fed officials will be closely monitored in the week ahead.

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

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