COMEX Gold prices experienced a significant downturn, marking their most substantial weekly loss in months. The yellow metal slid below the critical $1,900 per troy ounce threshold, primarily in response to a sharp surge in US treasury yields. This surge in yields elevated the opportunity cost of holding gold.
At its September policy meeting, the US central bank-maintained interest rates at their current levels but provided clear indications of another rate hike before the year’s end. Moreover, the central bank signalled fewer rate cuts for the following year than previously anticipated. Economic data released during the week pointed towards the resilience of the US economy. Notably, new orders for manufactured durable goods unexpectedly rose by 0.2% month-on-month in August 2023. Additionally, unemployment claims remained near a seven-month low, and US GDP growth for Q2 2023 was confirmed at 2.1%, all contributing to the Federal Reserve’s hawkish stance.
Further impacting gold prices, the S&P CoreLogic Case-Shiller 20-city home price index in the US recorded a 0.1% year-on-year increase in July 2023, marking the first rise in five months. This rebound in US home prices, coupled with soaring energy prices, raises potential upside risks for the inflation outlook.
Amid expectations of increased treasury sales, growing debt, a hawkish Federal Reserve, and better-than-expected economic data, the yield on 10-year US treasury notes surged to a 16-year high of 4.68% on Thursday, exerting downward pressure on precious metal commodities.
Investment demand for gold also waned as SPDR Gold ETF holdings plummeted to their lowest levels in four years. This decline in holdings coincided with the spike in treasury yields. Hawkish comments from Federal Reserve officials, coupled with robust economic data and prospects of a soft economic landing in the US, led investors to consider the possibility of higher interest rates. The September Summary of Economic Projections (SEP) released after the FOMC meeting revealed a very hawkish upward revision to the fed funds rate projections for 2024 and 2025, with policymakers anticipating fewer rate cuts, further fuelling the rise in yields.
Federal Reserve officials have been vocal about their intention to implement additional interest rate hikes to bring inflation back in line with the 2% target. Fed Chair Jerome Powell emphasized the importance of the Federal Reserve’s ability to influence economic decisions and anchor inflation expectations during a town hall event in Washington.
In the upcoming week, the US economic calendar is packed with key events, including ISM PMIs, labor data, and comments from Fed Chair Jerome Powell. Powell is expected to reiterate the necessity of maintaining higher rates for an extended period, which could potentially prompt further outflows from ETFs. However, incoming economic data will be closely scrutinized, and any signs of economic weakness may provide some support. Otherwise, gold prices may continue to decline, driven by a stronger dollar and elevated yields.In terms of price action, spot gold in dollar terms has breached a crucial support level near $1,884 per troy ounce, concluding the week at its lowest point since March 2023. It has also penetrated a wedge pattern, indicating the potential for further weakness, with a possible extension down to $1830 per troy ounce, provided that the support-turned-resistance level of $1,884 per troy ounce holds on a weekly closing basis.
(The author is Vice President, Head Commodity Research at Kotak Securities)
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