No justifications for gold’s recent rally, investors riding on Fed rate cut hope

Spot gold closed with a solid gain of 1.76% at $2330 Friday as the metal rallied for the third straight week. It hit a fresh record high just above $2330. It posted a whooping gain of nearly 4.50% on the week despite surging yields and a largely steady US Dollar. Part of the gains this week could be attributed to escalating Middle East tensions on possibility of a direct war between Israel and Iran.

The ten-year US yields were up 2.14% Friday and were up around 4.70% on the week. The two-year US yields closed at 4.76%, up by 2.26% Friday and were up around 2.50% on the week. The US Dollar Index failed to capitalise on a stellar job report as healthy risk appetite weighed on it; however, it closed with a gain of 0.06% at 104.29 Friday and was down by roughly 0.20% on the week.

Data roundup
The US non-farm payroll report (March) was encouraging as payrolls rose by 303,000 (forecast 200,000), the most in nearly a year, though driven mostly by part time jobs, and the unemployment rate dropped to 3.80% from 3.90% in February. Job gains in the prior two months were revised upward by a combined 22,000. The job growth was led by sectors like healthcare, construction, leisure, and hospitality. Average hourly earnings m-o-m and y-o-y at 0.30% and 4.1% respectively matched their respective forecasts. The participation rate rose to 62.70% from 62.60%, the first rise since November. The number of weekly hours rose to 34.40 from 34.30. In a noteworthy development, the difference between jobs in the payrolls report and employees in the household survey narrowed in March for the first time since November.

The US ISM manufacturing Index rose to 50.3, which was above the estimate of 48.4 and the February’s 47.8 reading. JOLTs job openings (February) came in at 8756k Vs the forecast of 8730k, though the January figure was revised lower by 115k to 8863k. February factory orders were noted at 1.40% Vs the forecast of 1%, whereas durable goods orders came in at 1.30% Vs the estimate of 1.40% in the final reading. ISM Services Index data which came in at 51.40 Vs the estimate of 52.80, while prices paid slipped from 58.60 in February to 53.40 and employment at 48.50 fell short of the forecast of 49.

Geopolitical Watch
Geopolitical tensions have heightened yet again as Israel’s attack on Iran’s consulate in Syria killed two Iranian generals, which in turn has drawn the threat of a harsh response from Iran. Israel is putting all its embassies across the world on a high alert on possibility of a retaliation from Iran. Concerns about a direct confrontation between Iran and Israel are growing.
Fedspeak: Slightly hawkish
Earlier in the week, the Fed Chair Powell, in his speech at Stanford University, reiterated his wait-and-see stance. He reaffirmed that it will likely be appropriate to begin lowering rates at some point this year as recent inflation figures – though higher than expected- did not materially change the overall picture. Federal Reserve Bank of San Francisco President Mary Daly said that three rate cuts this year seems to be a reasonable baseline, though it is not a promise. Fed’s Mester said she still expects the Fed can cut rates later this year but doesn’t see the case for cutting at the next meeting. Chicago Fed President Austen Goolsbee said that he anticipated two rate cuts this year, but he questioned whether bank should cut rates at all if inflation remains sticky. Minneapolis Fed’s Neel Kashkari reiterated the view that there might not be rate cuts if inflation stalls. Dallas Fed President Logan said that it was too soon to think about cutting rates given the upside risk to inflation.
Data next week
Next week, major macroeconomic releases from the US include CPI inflation data (March), FOMC meeting minutes (March 20), PPI final demand (March), import and export price Index (March), weekly jobless claims, University of Michigan Sentiment (April preliminary) and inflation expectations. Out of the UK, focus will be on monthly GDP (February). Euro-zone’s major data on tap include Germany’s industrial production (February), CPI (March final) and the Euro-zone’s Sentix Investor confidence (April). Investors will look forward to China’s PPI, CPI (March) and trade balance data (March), too.

ETF

Total known global gold ETF holdings stood at 82.161MOz as on April 4, which was slightly less than the previous week’s level.

Weekly outlook
The US CPI data and FOMC minutes will be the two most crucial reports next week. Investors continue to ignore data as they lean towards Fed rate cuts as projected by the Fed. Gold is over-extended at present. It is difficult to justify the week’s gains, though geopolitical tensions could have been instrumental to some extent. Hotter than expected CPI inflation and contained geopolitical tensions will weigh on the metal. Resistance is at $2360/$2400. Support is at $2300/$2250/$2200. A short term correction won’t be surprising.

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