Gold bulls fail to survive the US jobs report; US dollar reclaims upper hand

It was a good week for gold, at least until Friday. However, the US jobs report has forced market players to reassess if the recent upward momentum can continue for long.

Gold rose 0.5 per cent last week, marking its third consecutive weekly gain but ended well off the lows and short of the key $1800/oz level.

The trend in the US dollar continued to be a key price determining factor for gold, and this trend may persist as market players try to determine Fed’s monetary policy stance.

The US dollar index tested a four-week low last week but recovered to end the week higher and brought a halt to its two-week losing streak.

Similarly, the US 10-year bond yield slipped to April lows earlier this week but recovered to end higher for the week ended August 5.

The US Federal Reserve raised the interest rate by 0.75 per cent in July, similar to the pace seen in June. This, with Fed Chairman’s comments that they may take a meeting-by-meeting approach, has fueled debate about Fed’s future monetary policy stance.

Amid uncertainty about the US Fed, market players have been looking at the US economic numbers, and the central bank has commented to determine Fed’s next move, and this has caused volatility across financial markets.

The US dollar rose last week, and gold with other commodities came under pressure as the US jobs report and comments from Fed officials fueled expectations that the central bank may continue with interest rate hikes.

The US non-farm payrolls report noted a 528,000 increase in US jobs for July, well above market expectations of a 250K increase.

The unemployment rate unexpectedly fell from 3.6 per cent to 3.5 per cent. Average hourly earnings rose 0.5 per cent against the forecast of 0.3 per cent growth.

US economic data released in the last few days have been mixed, highlighting stress in the economy; however, the jobs report confirmed that the labour market is still running strong.

With the unemployment rate low and jobs growth strong, the US Fed will get more room to continue with interest rate hikes.

Several Fed officials spoke last week, and most maintained that the central bank may continue with interest rate hikes as getting inflation under control is still the priority.

With hawkish comments from Fed and a strong US jobs report, market players are now expecting Fed to continue with aggressive hikes. However, with the Fed taking an open-ended approach, we may still see volatility continuing as market players respond to economic numbers and central bank comments.

The US dollar is also challenged by the hawkish stance of other central banks. The Bank of England has been raising interest rates since December; however, the central bank decided to fasten the pace from 0.25 per cent to 0.5 per cent as inflation is still out of control.

The Reserve Bank of India (RBI) also delivered a 50 basis points rate hike to control rising price pressure.

While the trend in the US dollar continued to be a key price-determining factor, gold saw some gains last week due to increased tensions between the US and China over the visit of US House Speaker Nancy Pelosi to Taiwan.

In retaliation, China conducted military drills near Taiwan, ended cooperation with the US on many issues, and imposed sanctions on Speaker Pelosi.

Increased tensions in the region may keep market players nervous; however, market reaction may subside if there is no major escalation.

Gold attempted to test the key $1800/oz level last week, but failed to revive investor interest.

Gold holdings with SPDR ETF slipped to fresh January lows last week, showing that investors are not confident about recent price gains. Gold is also challenged by concerns about consumer demand in India and China.

Gold witnessed a sharp rebound in the last few days; however, the rally lost momentum just short of the $1800/oz level.

We expect to see volatile trade in the US dollar as market players assess the monetary policy stance of the Fed and other central banks and may reflect in gold and other commodities as well.

The next major cue may come from US inflation data. A strong reading may fuel expectations of another major hike by the Fed which may put pressure on gold prices.

(The author is Associate Vice President – 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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