Gold gains for second week on indications of Fed pause

COMEX Gold prices saw a second consecutive weekly increase, tracking a decline in US benchmark treasury yields and the dollar value. These declines were prompted by a series of labour market indicators released at the beginning of the week, indicating a softening in the job market. US 2-year treasury yields, often considered a proxy for short-term rates, dropped by 15 basis points. The dollar index also fell below 104 levels on Tuesday, following the release of JOLTs job openings data, which showed the lowest level since March 2021.

Notably, this marked the third consecutive month of declining job openings, suggesting a gradual slowdown in the labour market after months of significant monetary policy tightening by the Federal Reserve. This development increased the belief that the Fed is approaching the conclusion of its tightening campaign, typically seen as a positive factor for non-yielding assets like gold.

This trend persisted throughout the week as the GDP growth rate was revised downward. Additionally, figures from ADP revealed that the US added the fewest jobs in five months in August. These factors led traders to scale back their bets on a Federal Reserve interest rate hike next month.

Following a series of disappointing data releases during the week, expectations for further Fed rate hikes decreased significantly, providing support for gold prices. The US PCE price index, the Fed’s preferred inflation measure, met expectations, while consumer spending saw a significant increase in July. However, the rise in spending was primarily attributed to a reduction in savings, a trend that may not be sustainable.

The eagerly awaited US non-farm payrolls report delivered mixed signals. Payrolls expanded by 187,000 in August, surpassing estimates of 170,000, indicating a resilient labour market. However, it’s worth noting significant downward revisions in counts from previous months, suggesting an easing from historically tight labour market conditions. On the other hand, average hourly earnings grew modestly by 0.2% on a monthly basis, signalling softening wage inflation.

Year-on-year, average hourly earnings increased by 4.3%, falling short of the forecasted 4.4%. The unemployment rate unexpectedly rose to 3.8%, a significant increase from July and the highest since February 2022. This unexpected spike was largely attributed to an increase in the labour force participation rate, reaching 62.8%, its highest level since February 2020. Overall, the data presented a mixed picture but indicated a still-tight labor market, supporting the US dollar’s recovery from lower levels.
In terms of investment demand, holdings in the SPDR gold ETF rose from 884.04 tonnes in the previous week to 890.1 tonnes as of August 31. Robust economic data from the US in the first half of August prompted markets to price further rate hikes by the Fed, leading to higher yields and outflows from ETFs. However, this trend is gradually reversing.Looking ahead to the coming week, the focus will be on the US ISM Services PMI. Subsequently, US CPI and retail sales data will be released, three major indicators that could impact Fed policy expectations for the September meeting. In a speech at the Jackson Hole symposium, Fed Chair Powell mentioned that the central bank might “proceed carefully when deciding to hike again or hold steady,” and market expectations are leaning towards a pause in September. Considering signs of easing inflation and a softening labor market, it appears that we are nearing the end of the Fed’s rate hikes, which could continue to support gold prices.

(The Author is Vice President – Head Commodity Research at Kotak Securities Ltd)

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