Gold ends with gains for third straight week as US inflation falls, economic concerns grow

Spot gold corrected lower on Friday following three straight days of gains which had pushed it to the highest level since May 22. The metal closed with a slight loss of 0.11% at $2411 on Friday as it rose for the third straight week. It was up 0.83% on the weekly closing basis.

The US bond yields/Dollar Index

The US yields and the US Dollar Index slumped to multi-week lows on the subdued US CPI inflation data (June). The ten-year US yields slid 0.60% on Friday as the yields fell around 2% on the week. The two-year yields, more sensitive to monetary policy, were down nearly 3% on the week. The US Dollar Index was down about 0.80% this week.

Data round-up

US CPI inflation data trailed the forecast on all the counts as rents, the sticky component moderated. CPI m-o-m came in at -0.10% (forecast 0.10%), CPI ex food and energy m-o-m at 0.10% (forecast 0.20%), CPI y-o-y at 3% (forecast 3.10%), and CPI ex food and energy y-o-y was noted at 3.30%(forecast 3.40%).

The US PPI data, released on Friday, was noted at 2.6% y-o-y, (forecast 2.3%). PPI m-o-m showed a rise of 0.2% in June (forecast 0.1%). The PPI ex food and energy was above the forecasts on both the m-o-m and y-o-y basis. University of Michigan consumer confidence trailed the forecast; however, inflation expectations were lower than the estimates.Powell’s testimony

The US Federal Reserve Chair Powell in his two-day testimony to the Senate Banking Committee and House financial services sounded more positive on rate cuts. He said that the Fed will not wait for the 2% inflation target to cut rates. The economy and the job market were no longer overheated.
Fed fund rate cut probability

September rate cut probability stands above 90% now as markets look for two/more than two rate cuts this year.

Data and events next week

The key US data to be released next week include retail sales advance, industrial production, housing starts and Philadelphia Fed manufacturing index. Out of China, focus will be on the third plenum (July 15-18), industrial production, retail sales and Q2 GDP. Traders will also pay attention to the Fed Chair Powell’s speech on Monday.

Outlook

The Fed Chair Powell now being more positive on rate cut possibility, sharp decline in CPI inflation data and continuous gold buying by central banks will act as a strong tailwind for the metal, though China refraining from gold buying for the second straight month is somewhat negative for gold. The US Dollar Index and the US yields sinking to multi-week lows reflects increased rate cut optimism. CPI falling unexpectedly lower hints at weakening the US economy, too, which is evident in the nonfarm payroll report (June) and ISM PMIs as well.

Gold is likely to trade with a positive bias as traders aim for $2500 in coming weeks/months. Support is at $2390/$2364/$2347. Resistance is at $2435/$2450.

Dip buying strategy is preferred.

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

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