While we give credence to the recent uptrend action in gold and silver, we now see the potential for a top. Gold prices steadied on Friday and were on track for their fourth consecutive weekly gain, as broader weakness in the dollar countered pressure from an uptick in the Treasury yields and prospects of U.S. interest rate hikes.
“Fundamentally gold is facing conflicting factors here. On one hand, we have a weaker U.S. dollar helping, but the other side of the equation is of course the rise in yields” shared Bullion King of India.
“On the other hand, do not underestimate the importance of bringing inflation under control and continuing to tamp down recession fears through less aggressive rate hikes as that could remove macro-economic headwinds for many commodities” added Prithviraj Kothari.
Let’s take a look at the conflicting factors affecting gold-
Weakening US dollar- The dollar was set for its third weekly loss in four, making gold less expensive for other currency holders. [USD/] . Gold has struggled to make significant headway despite the correction in both the U.S. dollar index and the easing in the 10-year U.S. treasury bond yield,” said independent analyst Ross Norman. The dollar index weakened, making bullion appealing to overseas investors
Interest Rate Hike- U.S. benchmark rates are currently between 2.25% to 2.5%. Their comments offset optimism over an unexpected fall in U.S. producer price inflation in July, data showed on Thursday. This came after reading on Wednesday showed U.S. consumer price inflation remained static through July, after rising exponentially earlier in the year.
gold prices retreated on Friday, as hawkish comments on interest rate hikes by the Federal Reserve outweighed optimism over signs of cooling U.S. inflation.
But overnight comments from Fed officials on the path of policy tightening kept investors uncertain over future interest rates.
Data on Thursday showed U.S. producer prices unexpectedly fell in July. It came a day after news that consumer prices (CPI) were unchanged in July due to a drop in gasoline prices.
Inflation – “With U.S. inflation data now behind us, it is almost like the calm after the storm and that has led to tight ranges for currencies and commodities after a spell of volatility a couple of days ago
Fed funds futures traders are now pricing in a 61.5% chance of a 50-basis-point hike in September and a 38.5% chance of a 75-basis-point increase. Gold is highly sensitive to rising U.S. interest rates, as these increase the opportunity cost of holding non-yielding bullion. Weighing on gold by increasing the opportunity cost, benchmark U.S. 10-year Treasury yields hovered near a three-week peak.
However, Fed policymakers noted that they would continue to tighten monetary policy until price pressures were fully broken. U.S. Data- the number of Americans filing new claims for unemployment benefits rose for the second straight week, indicating further softening in the labour market despite still tight conditions as the Federal Reserve tries to slow demand to help tame inflation.
The U.S. economy unexpectedly contracted in the second quarter, with consumer spending growing at its slowest pace in two years and business spending declining. The second straight quarterly decline in gross domestic product largely reflected a more moderate pace of inventory accumulation by businesses as job gains overall have stayed strong.