Why gold stays vulnerable despite sharp uptick on Friday

Spot gold, reeling under the huge downside pressure due to lack of China’s stimulus details, strong US data and the Fed’s hawkish shift in its monetary policy announced on Wednesday fell below $2600, though it recovered some of its losses in the last two trading days of the week.

The metal closed with a gain of 1.13% at $2624 on Friday. However, it was still down nearly 1% on the week. It traded in the range of $2583-$2693 in the week.

Weak-looking gold got a fresh lease of life as the US PCE Price Index data (November), the Fed's preferred inflation gauge, released Friday came in a tad lower than expected.

Data and roundup


US PCE m-o-m, PCE y-o-y, Core PCE m-o-m and Core PCE y-o-y were noted at 0.1% (forecast 0.2%), 2.4% (forecast 2.5%), 0.1% (forecast 0.2%) and 2.8% (forecast 2.9%) respectively. The real personal spending (November) at 0.3% matched the forecast and was higher than the prior data of 0.1%. University of Michigan one year and five-ten year inflation expectations at 2.8% and 3% also trailed their respective forecasts of 2.9% and 3.1%.

The data released earlier in the week showed that the US 3Q GDP growth rate and retail sales beat the forecasts.

FOMC monetary policy decision


On November 18, as expected the US Fed cut the Fed Fund rate by 25 bps to 4.25%-4.50% range; however, it signalled a temporary hawkish pause in its rate cut spree. The rate cut decision was opposed by four FOMC members – one voting and three non-voting. The economic dot plot shifted higher as per new summary of projections (SEP).

As per the latest SEP, the members see core PCE inflation at 2.8%, 2.5% and 2.2% in 2024, 2025 and 2026, respectively, as compared to 2.6%, 2.2% and 2%, respectively, the September SEP.

GDP growth rates have been revised higher: 2024, 2025 and 2026 GDP growth rates are expected to be 2.5% (previous forecast in September 2%), 2.1% (previous 2%) and 2% (previous 2%) respectively. Projected unemployment rates are 4.2%, 4.3% and 4.3% as compared to the previous forecasts of 4.4%, 4.4% and 4.3%, respectively. At the same time, the Fed sees 2 rate cuts in both 2025 and 2026 as compared to 4 cuts in each of these years as forecasted earlier.

The Bank of England and Bank of Japan went for a dovish hold in their monetary policy decisions, which is positive for the US Dollar.

Upcoming data


Major US data in focus next week include Conference Board Consumer Confidence (December), durable goods orders (November preliminary), new home sales (November) and weekly job data. Traders will keep a tab on UK GDP (3Q final) also.

ETF


Total known global gold ETF holdings fell to 82.647 MOz on December 19 and were on the course of the third straight weekly decline. ETF holdings are down nearly 2% from the cycle high of 84.143 Moz as noted on October 23.

US Dollar and yields


Buoyed the Fed's hawkish shift and stellar US GDP report, the US Dollar Index rose to 108.541, the highest level since November 10, 2022. The index eased to 107.82, down 0.55% on the day on Friday in line with the US yields on the US PCE data. Nonetheless, it was up nearly 0.82% on the week. The ten-year US yields rose to 4.59%, the highest since May 30, before settling 0.77% lower at 4.53% on Friday, still ending around 3% higher on the week. The two-year US yields rose to 4.37%, highest in almost a month, before closing at 4.31%, around 2% higher on the week.

Outlook


PCE Price Index, the Fed’s preferred gauge of inflation, rising at slower than expected rates on all counts is somewhat positive for gold and other commodities; however, core PCE at 2.8% y-o-y is still way too high for the Fed which has clearly expressed its intention to get inflation under control as its prime focus as the US employment market and GDP growth rate are healthy. The Fed’s new projection sees the core PCE stuck around 2.5% in 2025, which means that the November reading of 2.8% won’t matter much to the Fed’s rate cut estimates, though markets are now leaning towards a cut as soon in September.

Strong US GDP and retail sales data would keep a floor under the yields and the US Dollar Index; thus, supported by hawkish Fed, too, US yields and Dollar are expected to remain buoyant unless we get a string of weaker-than-expected key data.

Liquidity is likely to be thin next week as traders leave for holidays, which may lead to exaggerated moves at times. Nonetheless, unless geopolitical tensions escalate further to a disconcerting degree, gold may struggle to advance in a meaningful way on a sustainable basis.

In the short term, the stiff resistance at $2,670 is a big hurdle for the bulls. The next major resistance is at $2,700. Support is at $2,606/$2,581/$2,580. Overall, despite a mild recovery, gold remains vulnerable. Selling into rallies remains the preferred strategy in the short term. A test of $2536 is not ruled out in the coming weeks.

(The author is Associate Vice President, Fundamental Currencies and Commodities at Mirae Asset Sharekhan)

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


(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com)