Helped by weaker-than-expected US ISM services data that negated the impact of an encouraging non-farm payroll report, spot gold recovered in an extremely volatile session on Friday to close with a gain of 0.12% at $2,046. However, despite an impressive recovery from Friday’s low of $2,024, the metal closed with a loss of around 0.80% on the week.
The US data released on Friday were mixed as the non-farm payrolls rose 2,16,000 versus the forecast of 1,75,000, as the prior data stood at 1,73,000 jobs. Unusually warm winters boosted the job sector as health care, government, construction, leisure and hospitality sectors led the job gains. Net two-month job revisions stood at -71000. Earnings were upbeat as average hourly earnings stood at 0.4% m/m versus the forecast of 0.3%, thus keeping pace with the prior data of 0.4%. Y-o-Y average hourly reading was noted to be 4.1%, which topped the forecast of 3.9%. The unemployment rate of 3.7% matched the prior data of 3.7% but was better than the estimated figure of 3.8%.
However, the labour force participation rate slipped to 62.5% vs the prior 62.8%, which reflects a risk of a pickup in wage inflation. Change in household employment was -6,83,000. Household survey data will be revised back 5 years with Friday’s release. The stellar nonfarm payroll job report is not without certain caveats as it is taking longer for Americans to find work. In addition, the number of full-time employees dropped the most since April 2020 as temp-help employment dropped to the lowest level since May 2020. Hours worked eased to 34.30 from 34.40 as the underemployment rate edged up to 7.10% from 7%.
Gold prices came under intense immediate downside pressure on better-than-expected US non-farm payroll data. However, weaker-than-estimated ISM services data turned the tide to catapult gold sharply higher as the US yields pummelled. The US ISM services PMI data fell to a seven-month low of 50.60 in December compared to 52.70 in November and the forecast of 52.60. Price pressure eased slightly to 57.40 from 58.30 in November as employment contracted to 43.30 from 50.70 in November.
The ten-year US yields rose nearly 4% on the week to settle at 4.04% as the yields eventually ended over 1% higher Friday. The US Dollar Index closed with a weekly gain of around 1% at 102.43 as the Greenback closed virtually unchanged Friday in a choppy session.
ISM services data and weak internals of the nonfarm payroll data have negated the impact of positive surprises in S&P Global US manufacturing and services PMI data and weekly job data released earlier in the week.
Total known global gold ETF holdings fell for the third straight day on January 4 to the lowest level since October 19. Tepid investment demand for ETFs is being eclipsed by strong buying by the central banks.Reported global central bank gold reserves rose by a net 44 tonnes in November as gross purchases (60 tonnes) outweighed gross sales (15 tonnes). Major central banks that bought gold include the Central Bank of Turkey, which bought 25 tonnes, the National Bank of Poland and the People’s Bank of China.
Besides weaker-than-expected US ISM services data and solid central bank buying, gold is expected to get support from geopolitical issues over Houthi’s Red Sea strikes as the US and many other nations warned the Iran-backed Houthis to refrain from the Red Sea attacks. Conflict building around the Red Sea could be a potential source of an increase in regional instability.
Next week, investors will focus on US CPI inflation (December), PPI inflation and goods trade balance data. Euro-zone’s unemployment rate (November), consumer confidence (December final), retail sales (November) and Sentix investor confidence (January) will also be on tap. Out of the UK, November monthly GDP will be of particular interest to investors. Japan’s Tokyo CPI inflation data is also due this week.
After Friday’s data, the Fed rate cut probably has come down to 63% from 73% observed a week ago.
Although traders have pared down some of their drastic rate cut bets, gold is expected to find good support in the dips on hopes from the upcoming US CPI inflation data due this week, thus traders are likely to buy the dips.
Support is at $2,021/$2,015/$2,000. Resistance is at $2,055/$2,075/$2,090.
(The author is a Research Analyst, Sharekhan by BNP Paribas)