Gold vulnerability far from over despite last week’s gains

In the week ending August 25, spot gold closed with a gain of nearly 1.40% at $1914.60 meanwhile the total known global gold ETF holdings fell by around 0.15 million troy ounces in the week as outflows accelerated.

But the highlight of the week was much-awaited Federal Reserve Chair Powell’s speech at the Jackson Hole symposium on Friday. Powell didn’t offer any clear clues about the possibility of a pause in the Federal Reserve’s rate hike campaign as he continues to deem inflation to be quite high. He said that growth remains above trend and rates are in the restrictive territory, nonetheless, the Central Bank will assess the situation carefully and will hike rates further if required. Although his stance remains data-dependent, his comments can be construed as mostly hawkish.

The US data released in the week were somewhat mixed as the S&P Global US composite PMI (August preliminary) at 50.40 fell short of the forecast of 51.50 and was lower than the previous reading of 52. The services PMI came in at 51 Vs the forecast of 52.20, though it continues to be in the expansion zone. Existing home sales (July) missed the estimate; however, new home sales (July) topped the forecast. Initial jobless claims (August 19) at 230,000 fell to a three-week low, thus indicating a still tight job market despite steep rate hikes. Headline durable goods orders (July preliminary) sank 5.20% as against the forecast of a decline by 4%, though durables ex-transportation at 0.50% beat the forecast of 0.20%.

The situation in Europe looks worrisome as the UK services PMI unexpectedly contracted for the first time since January with the August preliminary reading falling to 48.70 as against the forecast of 51. Composite PMI data fell into the contraction zone for the first time in seven months as manufacturing PMI at 42.50 fell well short of expectations of 45. The Euro-zone data were no better as the region’s services PMI data at 48.30 Vs the estimate of 50.50 (August preliminary) dipped into contraction territory for the first time since end-2022. Germany, the Euro-zone’s growth engine, witnessed a sharp contraction in August as its services PMI data tumbled to 47.30, thus marking the first contraction in its services sector since end-2022. The German economy was stagnant in 2Q as the y-o-y GDP shrank by 0.60%.

China’s Yuan remains vulnerable as the currency fell to a 16-year low against the US Dollar on the nation’s economic woes despite both the government and the Central Bank taking a multitude of measures to support consumption and the economy.

The US Dollar Index surged past the key psychological figure of 104 as the US economy is better placed than the European economies and concerns about the Chinese economy lead investors to safe haven refuge of the US Dollar. The Dollar Index was up around 0.75% on the week as it closed at 104.19. Ten-year US yields settled 2 bps lower at 104.23, whereas the two-year yields at 5.078% were up roughly 3%.
Next week, investors will closely monitor US JOLTs openings (July), ADP employment (August), Q2 GDP (secondary reading), core PCE deflator inflation (July) and nonfarm payroll report (July). Euro-zone’s consumer confidence (August final), CPI inflation and manufacturing PMI will also be in focus. Germany’s job report (August), retail sales (July), CPI inflation (August preliminary) and manufacturing PMI (August final) will be on investors’ radar, too. In addition, China’s manufacturing and services PMIs (August) will further entertain the traders. Firm Dollar, elevated yields, unrelenting Fed, Yuan weakness and continuing global gold ETF outflows are negative developments for the yellow metal. On the positive side, Chinese economic concerns may support the metal. On the balance, gold looks vulnerable unless the US data starts showing deterioration in the nation’s economy, or the Chinese economy shows some promising sustainable trend.

Support for the metal is at $1,908/$1,900/$1,885, whereas the supply zone lies between $1,932 and $1,940, followed by $1,950.

(The author is Associate Vice President, Fundamental Currencies and Commodities at Sharekhan by BNP Paribas)

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