Not with standing weekly loss, downside in gold likely to remain limited

Spot gold traded in a narrow range of 2% in the week ending May 31 as the metal, in line with the other commodities, has been adjusting to the dwindling odds of multiple rate cuts this year on stubborn inflation data.

The ten-year US bond yields rose beyond the crucial level of 4.50% to hit the highest level in the last four weeks. Rising bond yields amid sticky inflation concerns are weighing on the commodities. At the same time, weak auction results and hawkish Fedspeak have also been instrumental in pushing the yields higher. The ten-year US yields rose to 4.638% on May 29, the highest since May 2.

Spot gold closed with a loss of 0.67% at $2327 Friday and was down nearly 0.25% on the week. Risk appetite remains weak on rate concerns.


Data round up

The Q1 US GDP matched the forecast of 1.30%, however, it was below the previous estimate of 1.60% as consumer spending slowed down. Pending home sales (April) were noted at - 7.70% MoM as against the forecast of -1%.

PCE core deflator inflation data (April), the Federal Reserve’s preferred measure of underlying US inflation, came in at 2.80% YoY, which was in line with the forecast. The MoM reading at 0.20% also matched the forecast, and was lower than 0.30% reading recorded in March. The inflation-adjusted consumer spending unexpectedly fell 0.1% due to a decrease in outlays for goods and softer services spending.

China’s PMI data released Friday were disappointing as manufacturing activity unexpectedly contracted in May. The official manufacturing purchasing manager index, after two consecutive months of gains, fell to 49.5 in May Vs a forecast of 50.5. The non-manufacturing came in at 51.1 as against the forecast of 51.5 and was lower than the April reading of 51.20.

Yields and the US Dollar Index

The US Dollar Index rose to a 2-week high but eventually closed with a weekly loss of 0.12% at 104.62.

The two-year US yields rose to 5%, the highest level since May 1, but retreated to close with a weekly loss of around 1.50% at 4.87%. The ten-year US yields fell 1.08% Friday to settle at 4.50%, and were up nearly 0.90% on the week.

Fedspeak

The Fed's Kashkari warned earlier this week that a rate hike is not entirely ruled out, whereas Williams said on Thursday that he expects the US inflation to be 2.50% this year and 2% next year as inflation is expected to moderate in the second half of the year. Atlanta Fed President Raphael Bostic stated the path to 2% inflation is not guaranteed due to the significant breadth of price gains.

Swiss Gold exports

Gold shipments from Switzerland, Europe's key refining hub, fell to 123.6 tons in April from 146.80 tons in March on the decline in sales to China. Sales to China fell 49% to 36.50 tons, though shipments to India more than tripled to 24.60 tons and sales to Turkey increased to 9.95 tons.

Gold ETF holdings

Total known Gold ETF holdings stood at 80.585 MOz as on May 30, which is lower than the 80.686 Moz as seen on May 24.

Upcoming data

The major US data on tap next week include ISM manufacturing and services (May), JOLTs job openings (April), nonfarm payroll report (May), factory orders (April), unit labour costs (1Q final) and durable goods orders (April final).

The Euro-zone's major data in focus include PMIs (May), PPI (May), and GDP (1Q final). Traders will look forward to the ECB's monetary policy decision, too. China will release its Caixin PMIs (May) and trade balance data (May).

Geopolitical watch

Israel defied international pressure to push deep into the central Gaza as ferocious street fighting goes on. Israel estimates it will take seven more months to accomplish its mission of finishing Hamas. As per the US administration, Israel has killed nearly 35% of Hamas fighters.

Outlook

Going by the action in bonds, the markets are still not giving much credence to the idea of a rate hike. The next week is quite crucial for the financial markets as many major data and reports will be released. The yellow metal is expected to find its footing soon. This sell off has offered once again a good opportunity to initiate long positions for medium to large term. Unless we see a major surprise upside in the US data next week, gold is expected to recover.

Support is at $2320/$2295-$2300 zone/$2277. Resistance is at $2350/$2365/$2380/$2400.

(The author is Associate Vice President, Fundamental Currencies and Commodities at Sharekhan by BNP Paribas)