Gold ekes out gains in a tumultuous week

Spot gold hit a fresh record high of $2,222 on a dovish FOMC monetary policy decision before giving back all the gains due to the resurgent dollar. It closed with a weekly gain of nearly 0.40% at $2,166 in an eventful week laden with monetary policy decisions of key central banks.

The metal fell to close around 0.80% lower on Friday as the US dollar rallied. The 10-year US yields at 4.21% were down over 2% on the week as the yields were 1.57% lower on Friday. The two-year yields fell 1% to end at 4.59% Friday and were down roughly 3% in the week. The US Dollar Index was up 0.40% Friday and up 1% on a weekly basis.

Global monetary policy easing

Although the US Federal Reserve came out with a hawkish dot plot at its FOMC meeting concluded on March 20, the fact that the bank stuck to its December prediction of three rate cuts in 2024 despite unsettling inflation readings in the first two months of the year made the overall FOMC outcome appear dovish. The Swiss National Bank unexpectedly cut rates on March 21 in a pre-emptive move after the Fed’s policy decision. The Bank of England went for a dovish hold in its monetary policy decision on March 21. Markets are currently pricing an 80% probability of the Bank of England cutting rates in June.

Dollar surges

The US dollar initially tumbled on the FOMC-led weakness, but it soon recovered to enjoy its best week in the last two months on easing prospects abroad. The US dollar is gaining as the key global central bankers may ease their monetary policy sooner than expected. The Chinese Yuan weakened past 7.20 on March 22. It was a key level that has held fast since November. The yuan fell as the People’s Bank of China lowered its daily reference rate for the managed currency by the most since early February. This weakening prompted traders to bet that policymakers are ready to allow for currency depreciation amid a sluggish economic recovery.

Data next week

The US data next week include new home sales (February), durable goods orders (February preliminary), FHFA house price index m-o-m (January), Conference Board Consumer Confidence (March), GDP annualized QoQ (4Q final reading), pending home sales (February), University of Michigan sentiment and inflation expectations (March final), personal income and personal spending (February), PCE deflator (February) and weekly jobless claims (March 23). Out of Europe, the focus will be on the UK’s GDP QoQ (4Q final); and the Eurozone’s consumer Confidence (March final) along with Germany’s retail sales (February) and unemployment change (March). China’s industrial profit for February will also draw some interest.

ETF flows

Total known Global Gold ETF Holdings stood at 82.34 MOz as of March 21 as SPDR Gold Shares, the world’s largest gold ETF fund, saw huge inflows in the wake of the FOMC monetary policy decision. The present level of holdings is higher on the week as such.

Geopolitical Watch

Israel said it would press ahead with its Rafah invasion plan despite US warnings. US Secretary of State Antony Blinken is in the region pushing for a six-week ceasefire deal between Israel and Hamas. The deal would lead to an exchange of hostages for Palestinian prisoners along with a big increase in humanitarian aid to the more than 2 million Palestinians in the coastal strip.

China’s warning

Investors should not consider gold as an asset similar to stocks but as part of their long-term portfolios, the China chief of an international trade association said as gold prices surged to a record high.

Weekly Outlook

US PCE deflator inflation data will be the most important data next week. The US Dollar Index is expected to extend its rally further, which may pressurise the yellow metal. However, the downside is likely to be limited to global monetary easing prospects. Investors are likely to buy the dips. Good buying support is expected from Chinese investors on concerns about domestic currency weakness.

Support is seen at $2146/$2120/$2100. Resistance is at $2180/$2204/$2225. A soft core PCE deflator inflation data will help the metal take another shot at record high.

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

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