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Gold Prices: Gold posts worst weekly drop this year after hawkish Fed minutes

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Gold recorded its worst weekly drop this year in the week ended May 24 following a hawkish stance in the FOMC minutes and strong US Purchasing Managers’ Index. The market is now expecting just one rate cut this year as traders recalibrate their interest rate expectations in the wake of the US data and Fed stance.

Spot gold closed at $2,334 on Friday, up 0.24%. The increase in gold prices was driven by the U.S. 10-year Treasury yield falling 0.26% to 4.467% on Friday. However, gold prices were down nearly 3.30% over the week after hitting a new record high of $2,450 on May 20.

The 10-year U.S. Treasury yield rose about 1% for the week, while the U.S. Dollar Index rose 0.30% for the week to 104.75.

Summary of data

US durable goods orders data (preliminary April figures) was released on Friday. Headline durable goods orders came in at 0.70%, beating expectations of -0.80%. Excluding the transportation sector, data also came in at 0.4%, beating expectations of 0.20%. The University of Michigan Business Sentiment Index (final May figure) was revised upward from 67.70 to 69.10, while 1-year and 5-10-year inflation expectations were 3.30% and 3%, respectively, below expectations of 3.40% and 3.10%.

The May FOMC minutes were released on May 22. The minutes were hawkish, with many policymakers calling for a prolonged high interest rate regime, and some questioning whether interest rates were subdued enough to bring inflation down to the Fed’s 2% target. The S&P Global US Manufacturing PMI (flash May reading) was 50.90 versus the expected 49.90, and the Services PMI was 54.80 versus the expected 51.20. Thus, the composite PMI was 54.40, well above the expected 51.20 and reaching its highest level since April 2022. Both input and output prices increased at a faster pace as manufacturing experienced its sharpest cost increase in a year. The robust PMIs reduced the likelihood of multiple rate cuts this year. New home sales (April) were below expectations, but initial jobless claims (May 18) were 215,000, above the expected 220,000. UK and Eurozone PMI data was mixed. UK April inflation data came in better than expected, reducing the chances of an early rate cut in June, which is never good for gold.

Next week’s data

U.S. data due next week include the Home Price Index (March), Conference Board Consumer Confidence Index (May), GDP Annualized Rate (final first quarter), Pending Home Sales (April), and PCE deflator inflation data (April). Key data from the Eurozone include the German CPI (May), IFO Business Sentiment Index (May), Wholesale Price Index (May), and Eurozone CPI (May). China’s PMI is due on May 31.

ETF Holdings

On May 23, total gold ETF holdings fell for the second consecutive day to 80.845 million ounces, slightly up from the previous week’s holdings of 80.77 million ounces.

Indian gold ETF holdings recorded outflows of Rs 3.9 billion in April after a year of average monthly inflows of Rs 4.4 billion. Nevertheless, total assets under management stood at Rs 328 billion at the end of April, up 5% month-on-month and 43% year-on-year.

Geopolitics Watch

The United Nations Court of Justice ordered Israel to stop its military operations in Rafah after South Africa asked the court to issue an immediate order to protect Palestinians in the Gaza Strip from massacres. However, Israel expanded its military operations in Rafah, announcing that one million civilians had been evacuated from the city. Meanwhile, China has warned Taiwan and said it will intensify countermeasures until complete unification is achieved. China has begun military exercises around Taiwan after Lai Ching-te became Taiwan’s president and interpreted his inaugural speech as a threat to the “One China” principle.

World Gold Council

Kavita Chacko, head of research at the World Gold Council, said India’s gold demand is expected to grow, mainly during the festive season in August and September, adding that high prices are expected to dampen jewellery demand.

Weekly Outlook

Spot gold may test the $2,300-2,310 support band. However, this ongoing sell-off presents a good opportunity to build mid- to long-term positions as most of the major US data following the FOMC meeting have been disappointing. Moreover, Fed officials continue to rule out further rate hikes. S&P and ISM PMIs paint a different picture of the US economy. The geopolitical backdrop is also supportive.

Resistance lies at $2350/$2380/$2400. The cycle low of $2277 is the next major support below $2300.

(The author is Vice President, Fundamental Currencies & Commodities, Sharekhan, BNP Paribas)

(Disclaimer: The recommendations, suggestions, views and opinions expressed by the experts are their own. They do not necessarily represent the views of the Economic Times)

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