Buying on dips likely to support gold prices

Spot gold closed almost flat at $1,940 on Friday as US treasuries fell, despite a weak monthly US job report. The surge in yields on Friday boosted the US dollar index, thus mitigating the impact of a weak job report. However, the yellow metal was up nearly 1.37% for the week as yields were lower in the week ending September 1.

The US non-farm payroll report for August was softer than expected. Although the headline job figure of 187k was higher than the consensus estimate of 170k jobs, July’s data was revised lower by 30k, extending the streak of downward revisions in monthly job reports, which has been a notable characteristic this year. The labor force participation rate jumped to 62.80% from 62.60% in July, reaching the highest level since February 2020. This increase could have contributed to the rise in the unemployment rate from 3.50% in July to 3.80% in August. Consequently, the increased labor force participation rate is expected to alleviate wage pressure to some extent, thus reducing wage inflationary pressures.

The US temporary help jobs declined 0.70% from July, which marked the third consecutive monthly decline. Its significance lies in the fact that employers start cutting down the workforce with temporary jobs, which increases the possibility of mounting job losses ahead. Average hourly earnings in August slipped to 0.20% from 0.40% in July and fell short of expectations of a 0.30% rise.

Average hourly earnings on a YoY basis were recorded at 4.30%, which matched the forecast. Two-month payroll revision was -110k jobs. Hours worked data was a positive point in the job report as the average weekly hours for all employees at 34.40 topped the forecast of 34.30 hours. US ISM manufacturing PMI data (August) improved to 47.60 from 46.40 in July, thus beating the estimate of 47 as ISM prices paid surged to 48.40 from 42.60 in July, which stoked inflationary concerns. US treasuries initially rallied on soft US job reports, however, the rally reversed its course on notions that seasonality, Hollywood strikes, and bankruptcy of trucking company Yellow Corp may have understated the headline figure that could be reversed in future job reports. Heavy corporate bond issuance worth $120 billion lined up in September and ISM prices paid data also weighed on the bonds.

Apart from a soft US nonfarm payroll report, other major highlights of the week included an unexpected contraction in the Canadian economy. Canadian GDP unexpectedly contracted by 0.20% vs the forecast of an expansion by 1.20%. Elsewhere, China’s banks cut mortgage rates to stimulate the real sector. China’s Caixin manufacturing PMI showed an unexpected expansion in August. Disappointing data out of Europe stoke stagflation fears.

The US dollar index closed the week with a weekly gain of 0.15% at 104.26. Two-year US yields were down roughly 3.80% to 4.87% on a weekly basis, whereas ten-year yields eased by around 5 bps to 4.18%.
Next week, investors will focus on Germany’s services PMI (August) and CPI inflation (August final). Euro-zone’s retail sales (July), GDP (2Q final), and ECB’s inflation expectations will be closely watched. UK’s major data due next week include services PMI. Out of the US, durable goods orders ( July final), ISM services PMI (August), and initial jobless claims will be of particular interest to market participants.Total known global gold ETF holdings rose for the second consecutive day on August 31.

Of late, fundamentals of gold have improved a bit on European stagflation concerns, loosening the US job market and US GDP Q2 getting revised lower. Nonetheless, volatility in yields and dollar strength will test the resolve of gold buyers.

Bulls may attempt a shot at $1965 resistance in the near term. The interim hurdle comes at $1955 while support is at $1931/$1914. For now, dip buying is expected to be a preferred trade.

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