In Friday’s session, initially, spot gold surged on a weak non-farm payroll report and came very close to its record high of $2483.73 as it rose to $2477.68, its session high. However, the yellow metal fell on meltdown in risk assets as investors liquidated their gold positions to offset their losses elsewhere. Similarly, the COMEX gold (October contract) rose to $2498.90, the highest since July 18, before turning lower.
Gold rallied 5.20% in July, its best month since February in which it had surged nearly 9%.
Yields and Dollar Index
The US yields and the Dollar Index slumped on a disconcerting US job report. The Dollar Index fell to 103.12, the lowest since March 14, whereas the 10-year yields sank to 3.78%, the lowest since December 2023, and quite close to the lowest level in more than a year. The ten-year yields fell 37 bps in July and were down around 20 bps on Friday. The ten-year US yields tumbled over 9% on the week. The two-year US yields, which are more sensitive to the monetary policy, slumped almost 50 bps in July and were down nearly 11% on a weekly basis as traders discount several rate cuts in the coming months.
Data and event round-up
The US employers added 114K jobs in July (forecast 175K jobs) as the unemployment rate surged to 4.30% (forecast) from 4.10% in July. Two-month payroll net revision stood at -29K. Change in private payrolls at 97K jobs lagged the estimate of 140K jobs. Average hourly earnings m-o-m rose 0.20% (forecast 0.30%), while y-o-y earnings growth also slowed to 3.60% (forecast 3.70%) from 3.90% in June Even average weekly hours all employees fell to 34.20 (forecast 34.30) from 34.30. It was outrightly a very weak report as the unemployment rate showed that Sahm rule has been triggered yet again. The data released earlier in the week were mostly dismal as weekly jobless claims surged to nearly one-year high as Q2 Employment cost Index, Unit labour costs and ADP data showed subdued wage and salaries growth.The US Federal Reserve, in its monetary policy meeting concluded on July 31 left the benchmark rate unchanged in the target range of 5.25%-5.50%, though the FOMC, in a subtle shift, noted that the risks to the Fed’s dual mandate were on both sides, which increases the possibility of a September rate cut. The Fed Chair Powell, in his presser, said that a rate cut in September was on the table if the Fed gets the kind of data it wants. The FOMC decision has been construed as dovish as the US yields sank further post-presser.The Bank of England cut its key interest rate for the first time in over four years as the Bank slashed the benchmark rate from 5.25%, highest since 2008, to 5%. The Bank of Japan hiked the benchmark rate by 15 bps, which fuelled the Japanese Yen rally further.
Geopolitical tensions escalated further on the killing of Hamas Chief and a Hezbollah commander, which also boosted gold prices.
Central bank buying
As per the World Gold Council, central banks reportedly bought 12 tons of gold in June. Including OTC demand, the total global gold demand in Q2 increased 4% y-o-y to 1258 tons, the highest Q2 on record. Owing to high prices, global jewellery demand fell 19% y-o-y to 391 tons, a four-year low. Central banks bought 184 tons in Q2, up 6% y-o-y. Gold used in technology rose 11% y-o-y on demand from the AI sector. Total global demand, excluding OTC demand, fell 6% y-o-y as high prices affected the consumption.
ETFs
Total known global gold ETF holdings stood at 82.473 MOz as of August 1, which was slightly lower than July-end level of 82.494 MOz; which is the highest monthly level since January. Following the weak ISM manufacturing and nonfarm payroll reports, traders are discounting hefty rate cuts this year and in the next as they look for the Fed to start with a 50-bps rate cut in September.
Data next week
Major focus will be on ISM services Index (July), which is likely to bounce back into expansion zone after contracting in June. Investors will pay attention to China’s PPI, CPI, trade balance and Caixin services data of July as both NBS and Caixin manufacturing PMIs have fallen into contraction zone; thus, heightening concerns about Chinese economy.
Outlook
Gold is expected to draw strong support from the concerns about the US and the Chinese economies. The Fed may cut rates by 100 bps this year as weakness in the job market and the economy shows that the Fed is now probably behind the curve. Geopolitical issues are supportive, too. Risk to bullish view may come from investors further liquidating their gold positions as risk appetite suffers. Nonetheless, dip buying will continue to support the metal. Support is at $2410/$2400/$2362. Resistance is at $2470/$2485/$2500/$2550.
(The author is Associate Vice President, Fundamental Currencies and Commodities at Sharekhan by BNP Paribas)
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