Eroding geopolitical risk premium not in favour of gold’s appeal

Dismal US monthly job report and ISM services data Friday sank the US yields and consequently, the US Dollar index, which propelled the gold prices above $2000. However, reduced geopolitical concerns led to a decline from the day’s high. Spot gold closed with a gain of 0.36% at $1992.72. It was lower on the week despite a sharp decline in the US yields and the US Dollar index, which shows that some of the hefty geopolitical risk premium built into the prices is now coming off.

The US Secretary of State Blinken, in his visit to Israel, supported Israel’s right to defend but he pressed for a humanitarian pause in the ongoing Hamas-Israel war, too, as he said that they need to do more for the Palestinians. At the same time, Nasrallah of Hezbollah claimed that he had no prior information about Hamas’s attack on Israel. These developments sent gold below $2000.

The yellow metal was down 0.60% on the week. The ten-year US yields fell 1.82% to 4.58% on Friday and slumped nearly 6% on the week. Likewise, the two-year yields settled 3% lower at 4.84% on the week. The US Dollar fell 1.07% to 105.06 on Friday as it recorded a weekly loss of around 1.50%. It is to be noted that the dovish FOMC outcome has also been instrumental in pushing the US yields and Dollar index lower.

The US data released on Friday was disappointing as the US employers added fewer than expected jobs in October and the US ISM services Index was short of forecast. The latest economic releases out of the US suggest that the streak of upside surprises in the US data is losing its momentum, which justifies the ‘wait and watch’ stance of the US Federal Reserve.

The US employers added 150K jobs in October as against the forecast of 180K jobs, whereas the unemployment rate crept higher to 3.90% from the previous figure and forecast of 3.8%. Two-month payroll net revision was -101K jobs. Average hourly earnings MoM stood at 0.20% Vs the estimate of 0.30%, while the YoY data at 4.10% was higher than the forecast of 4% but lower than the September figure of 4.20%. The labor force participation rate edged lower to 62.70% from 62.80% and was lower than the forecast of 62.80%, which will put upward pressure on wage inflation. ISM Services Index (October) came in at 51.80 vs the estimate of 53, though ISM services prices paid came in at 58.60, which was higher than the estimate of 56.60. The Employment Index fell to 50.20 from 53.40 in October, though the new orders Index improved to 55.50 from 51.80.

The US Data released earlier in the week were mixed: ISM manufacturing in October was noted at 46.70 Vs the forecast of 49; Conference Board Consumer Confidence at 102.60 topped the forecast of 100.50, though it was lower than the prior month’s revised figure of 104.30; housing prices rose more than forecast in August; Employment cost Index (Q3) at 1.10% was higher than the forecast of 1%; factory orders in September topped the forecast; initial jobless claims rose more than expected. Elsewhere, the European data showed that Germany’s GDP shrank 0.10% Vs the estimate of -0.20%, Germany’s CPI inflation data cooled down 0% m-o-m from 0.30% in September and 3.80% from 4.50% on a y-o-y basis as unemployment rose by 30K Vs the forecast of 15K.
The Euro-zone’s unemployment rate edged higher to 6.50% from 6.40% in September as GDP stagnated in 3Q on a q-o-q basis, while it grew just 0.10% y-o-y. Manufacturing activities continued to contract in Germany and the Eurozone. The UK’s manufacturing contracted faster than anticipated, though services PMI contracted at a slower-than-expected pace. China’s manufacturing unexpectedly contracted in October.Three major central banks concluded their monetary policy meets this week. The Bank of Japan maintained its ultra-easy monetary policy, though it tweaked its YCC band by allowing 1% as a reference point for ten-year yields. Markets were not impressed though. As expected, the Bank of England kept its benchmark rate unchanged; however, its forecasts for the next year were bleak as the Bank sees no growth next year as against the previous estimate of 0.50% growth, while unemployment is seen rising. The US Federal Reserve kept its rate unchanged as the Bank sees high yields and tighter financial conditions reducing the need for a hike in the near term. Although the Fed had kept its rate hike options open, markets have treated the FOMC decision as dovish, which is weighing on the yields and the US Dollar Index.

Next week, investors will focus on University of Michigan sentiment (November preliminary) and University of Michigan consumer inflation expectations. Out of Europe, the focus will be on the composite and services PMI of Germany and the Euro-zone, Germany’s final CPI (October), the Euro-zone’s retail sales, and the UK’s GDP (3Q preliminary). China’s trade balance and new Yuan loan data will also be out next week.

Total known global gold ETF holdings fell for the fifth straight day through November 2, which continues to reflect weak investment demand, though central banks buying gold has emerged as a strong offsetting factor.

Gold moves clearly show geopolitical risk premium is being eroded as the Middle East war is largely contained.

Gold is seen range-bound next week as $2010 has become a stiff resistance for the metal. In the absence of conflict escalation, the metal may correct lower, though traders can continue to buy the dips in $1970s. The next major resistance is at $2025. Support is at $1970/$1962/$1945.

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