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gold news: A lackluster week Beckons gold as focus shifts to Fed, BoE, BoJ policy outcomes

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At the beginning of the week, COMEX Gold saw some positive movement as the greenback weakened, triggered by Bank of Japan Governor Kazuo Ueda’s remarks hinting at possible policy shifts based on wage data by year-end. This spurred a rally in the Yen and Japanese government bonds. However, the dollar index has since gained momentum, on track for a ninth consecutive weekly rise, buoyed by robust US economic data that pave the way for higher interest rates. A dovish outcome from the European Central Bank (ECB) policy further boosted the dollar, consequently putting downward pressure on gold prices.

The annual inflation rate in the US accelerated for a second consecutive month, reaching 3.7% in August, up from 3.2% in July. The surge in oil prices over the past two months, coupled with declining favorable base effects from the previous year, contributed to the rise in inflation. Meanwhile, the core inflation rate moderated for the fifth consecutive month to 4.3%, aligning with market expectations.

Recent data revealed that US producer prices experienced the most significant increase in a year, while weekly jobless claims fell more than anticipated, and retail sales exceeded forecasts. Retail sales in the US rose by 0.6% month-on-month in August 2023, surpassing July’s downwardly revised 0.5% increase and beating expectations of a 0.2% advance. This indicates robust consumer spending despite high prices and borrowing costs, heightening the upside risks to the inflation outlook. The dovish stance of the ECB also benefited the greenback, with President Christine Lagarde signaling a potential peak.

Regarding investment demand, holdings at the SPDR gold ETF continue to decline and stood at 879.7 tonnes as of September 14, the lowest level since January 2020, compared to 886.64 tonnes the previous week. US 10-year yields have surpassed 4.3%, nearing a 15-year high. Further evidence of the resilience of the US economy has bolstered expectations that the Federal Reserve will maintain restrictive borrowing costs for an extended period, exerting downward pressure on the non-yielding precious metal.

The upcoming week will feature several central bank meetings, with the Federal Reserve, Bank of England, and Bank of Japan taking center stage. Additionally, flash PMIs from the US and European economies will be closely watched.

We anticipate the Federal Reserve to temporarily halt rate hikes in September, adopting a « wait and see » approach. However, they may retain the option to raise rates in the November/December FOMC meetings if inflation does not cool down. This strategic pause could enable the central bank to reinforce its hawkish stance and keep inflation expectations in check.

There is also the possibility of an increase in GDP growth projections for 2023, reflecting recent robust economic activity. Tea Fed funds rate projection for 2023 might hover around 5.6%, signaling the potential for one more hike and no rate cuts. Persistent upside risks to inflation and the recent economic strength could keep rates elevated, serving as a short-term headwind for gold prices. In terms of price movement, COMEX Gold has found support around the 200-day Simple Moving Average (SMA) at $1,929 per troy ounce on the daily chart. Nevertheless, it could encounter resistance around the $1,970 per troy ounce mark, which represents a descending trend line resistance. A sustained breakthrough above $1,970 per troy ounce may signal a potential temporary bottom. Until such a breakthrough occurs, it’s anticipated that gold will remain within a trading range, fluctuating between $1929 and $1970 per troy ounce.

(The author is Vice President-Head Commodity Research at Kotak Securities)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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