Gold falls for 2nd week as US yields rebound. Where’s it headed next?

Spot gold closed with a gain of 0.46% at $2,013 on Friday, however, despite this the metal closed nearly 0.50% lower on the week, which is its second straight weekly loss.

The ten-year US yields at 4.28% were up around 2.50% on the week, whereas the US Dollar Index was up around 0.15% on the week as it closed at 104.28.

Inflation likely to be back in focus

The US PPI data released Friday came in hotter than expected as stripping out food and energy costs, the core PPI surged 0.5%, topping the anticipated 0.1% gain; the PPI excluding food, energy, and trade services rose 0.6%, the largest one-month rise since January 2023. Rise in the PPI inflation data was driven by a jump in final demand services, which rose 0.60%, thus nullifying the impact of a 0.20% decline in goods prices. Housing starts fell 14.80% in January Vs the expectation of no change. University of Michigan consumer sentiment rose to 79.60 in February from 79 in January, although the data trailed the forecast of 80, it reached a multi-year high. University of Michigan one-year and five-year inflation expectations came in at 3% and 2.90% respectively, which were a tad higher than their respective estimates.

The US CPI inflation data (January), released earlier in the week, were hotter than expected across the board. The US CPI was up 0.3% m-o-m Vs the estimate of 0.2%, though the prior data was revised lower to 0.20% from 0.30%. Core CPI, which excludes food and energy, rose 0.4% Vs an estimate of 0.3%. CPI rose 3.1% in January on a y-o-y basis as against the expectation of 2.90%, whereas the core CPI excluding food and energy rose 3.9% Vs the forecast of 3.7%. Even import price and export price Indices were above the respective estimates.

Bearish implications of CPI and PPI inflation data have been mitigated to some extent by weak US retail sales (January) and housing starts (January) data. Although markets are treating the elevated inflation readings as a one-off event, pick up in the PCE deflator inflation data, Fed‘s preferred inflation gauge, will lead to markets becoming more cautious.

Aggressive rate cut probability diminishing

The probability of a March rate cut now stands at 10%, while that of a May rate cut fell to 24% from 64% observed before the release of the US CPI inflation data. Nonetheless, markets now assign a slightly higher possibility of 59% for a rate cut in June as compared to the 42% probability seen a week ago.

Investment demand remains lacklustre

Leading 14 global gold ETFs have seen a net outflow of around $2.40 billion this year through February 14. Total known Global Gold ETF holdings fell for the fourth successive day, which took the total holdings to 83.12 MOz, a fresh four-year low.India’s gold jewellery demand is likely to be muted in the near term in the absence of any meaningful price correction.

As per the World Gold Council, China’s wholesale gold demand saw the strongest January ever (272 tons) on restocking ahead of the Chinese New Year. Chinese gold demand may influence gold prices to some extent.

Focus on FOMC minutes, services and manufacturing PMIs next week

Next week’s US data include FOMC minutes (January 31), initial jobless claims (February 17), S&P Global US manufacturing and services PMI (February preliminary) and existing home sales (January). European data like S&P Global UK services and manufacturing PMI and Gfk consumer confidence; Euro-zone’s consumer confidence (February preliminary), manufacturing and services PMI, CPI inflation (January final), and Germany’s IFO business climate (February), GDP (4Q final), and services and manufacturing PMI will also be on investors radar.

Out of Asia, Japan’s trade balance (January) and services and manufacturing PMI data, and China’s new home prices m-o-m (January) will be the key data. China’s Central Bank will decide its 5-year and one-year Loan Prime rates on February 20. Economists expect the Bank to slash its 5-year Loan prime rate from 4.20% to 4.10% and keep the one-year LPR unchanged at 3.45%.

Geopolitical tensions will continue to simmer

Things are getting no better on the geopolitical front as Israel prepares for a ground assault on the city of Rafah, whereas tensions between Israel and Hezbollah continue to escalate. Nasarallah, the leader of Hezbollah, the Iran-backed militant group, said it would step-up its fight against Israel to retaliate against Israel targeting its positions and killing civilians in recent days.

Fedspeak mixed

Michael Barr, the Fed’s vice chair for supervision, in his prepared remarks Friday at Columbia University in New York, said that US regulators are closely focused on risks in commercial real estate loans, and have stepped up downgrades of lenders’ supervisory ratings amid new strains on their finances. He added that supervisors are looking at what banks are doing to mitigate potential losses, how they are reporting risks to their boards and senior management, and whether they have enough reserves and capital to handle CRE loan losses. Fed’s Goolsbee, a known dove, was dovish in his views on monetary policy as he said that rates may be cut even before the 2% inflation goal is met. Fed’s Bostic called for two rate cuts which could begin in summer provided conditions are right.

Weekly Outlook

Gold may have benefited from inflation and geopolitical concerns in the last two days of the week. However, gold is a poor inflation hedge, and geopolitical tensions are yet to escalate to a disconcerting level that could support gold prices in a sustainable way. Overall, in the absence of a major trigger, the metal will be vulnerable to fading hopes of early and sharp rate cuts.

Support is at $1984/$1965. Resistance is at $2032/$2050/$2065.

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

(You can now subscribe to our ETMarkets WhatsApp channel)