Gold records its worst weekly fall this year on hawkish Fed minutes

Gold recorded its worst weekly slump this year in the week ending May 24 on hawkish FOMC minutes and robust US PMIs. Now, markets largely look for just one rate cut this year as traders readjust their rate expectations in the wake of the US data and the Fed’s stance.

Spot gold closed with a gain of 0.24% at $2334 Friday. The gains came on subdued US yields as the ten-year US yields eased by 0.26% to 4.467% Friday. However, the metal tumbled nearly 3.30% on the week after hitting its fresh record high of $2450 on May 20.

The ten-year US yields were up around 1% on the week, which boosted the US Dollar Index that posted a weekly gain of 0.30% at 104.75

Data round up

US durable goods orders data (April preliminary) were released Friday. Headline durable goods orders came in at 0.70% Vs the expectation of -0.80% as even ex transportation data at 0.4% topped the forecast of 0.20%. University of Michigan Sentiment (May Final) was revised higher from 67.70 to 69.10, whereas one-year and 5-10 year inflation expectations at 3.30% and 3% were lower than their respective forecasts of 3.40% and 3.10%.
FOMC minutes of the May meeting were released on May 22. The minutes were hawkish as many policy committee members looked for a higher for longer rate regime, and some of them even questioned whether the rates were restrictive enough to bring the inflation down to the Fed’s 2% goal.S&P Global US manufacturing PMI (May preliminary) came in at 50.90 Vs the forecast of 49.90, while services PMI was noted at 54.80 as against the forecast of 51.20; thus, composite PMI at 54.40 was way above the forecast of 51.20 as it hit the highest level since April 2022. Both input and output prices rose at faster rates as manufacturers witnessed the steepest cost increase in a year. Robust PMIs diminished the chance of multiple rate cuts this year. New home sales (April) trailed the forecast, though initial jobless claims (May 18) at 215K were better than the expected data of 220K.The UK’s and the Euro-zone’s PMIs data were mixed. The UK’s April inflation data were hotter than expected, which has dented the possibility of an early rate cut in June, which certainly does not support gold.

Data next week

The US data next week include House Price Index (March), Conference Board Consumer confidence (May), GDP annualized (Q1 final), pending home sales (April) and PCE deflator inflation data (April). Out of the Eurozone, major data on tap include Germany’s CPI (May), IFO Business Climate (May), Wholesale Price index (May),and the Euro-zone’s CPI (May). China’s PMIs will be released on May 31.

ETF Holdings

Total known Gold ETF Holdings fell for the second consecutive day on May 23 and stood at 80.845 Moz, which is slightly higher than the previous week’s holdings level of 80.77 MOz.

Indian Gold ETF holdings witnessed an outflow of Rs 3.90 billion in APril after a year long inflows with average monthly inflows of Rs 4.40 billion. Nonetheless, the total AUM as of end April was up 5% m-o-m and at Rs 328 billion was up 43% y-o-y.

Geopolitical Watch

The UN Court ordered Israel to halt Rafah military operations as South Africa had asked the Court to deliver an immediate order to protect Palestinians in Gaza from genocide. However, Israel has expanded its military operations in Rafah and said that one million civilians have moved out of the city. Elsewhere, China warned Taiwan and said that it would ramp up its countermeasures until complete reunification was achieved. China launched military drills around Taiwan after Lai Ching-te took office as President of Taiwan and China construed his inaugural speech a threat to one-China principle.

World Gold Council

Kavita Chako, the World Gold Council’s research head, said that the Indian gold demand is expected to revolve primarily around the August-September festive period. She added that Jewellery demand is expected to be subdued due to high prices.

Weekly Outlook

Spot gold may test the support band of $2300-$2310. However, this ongoing sell off provides a good opportunity to build positions for medium to long term as most of the key US data post-FOMC meetings have been disappointing. In addition, the Fed officials have continuously ruled out further rate hikes. S&P and ISM PMIs portray different picture of the US economy. Geopolitical backdrop is supportive, too.

Resistance is at $2350/$2380/$2400. The cycle low of $2277 is the next major support below $2300.

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

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