fed: Fed hinting at longer high interest rate regime casts shadow on gold’s investment appeal

Comex December gold future slid 1.55% through the week as the contract finished around $1916.50, and spot gold was at $1889 an ounce, at its weakest level in five months, pushed down by strengthening USD and surging UST yields amid growing bets for higher for longer interest rates from US Fed from the traders. The dollar index attained its fifth straight weekly gain as it ended the week up by 0.55% at 103.37.

Last week’s losses came after a spate of strong economic data caused investors to cut down expectations of rate cuts which drove up government bond yields as there is nearly 91% chance of the Fed holding rates at current levels at its September meeting. The US weekly jobless claims fell to 239K, largely in line with consensus but we believe the labour market is expected to further loosen over the coming months as companies respond to slowing demand, partly driven by the Fed’s tighter monetary policy.

The inflation at the factory level in July firmed at the fastest pace since January causing concern over the stickiness of inflation, Consumer spending rose as retail sales increased by 0.73% in July, The latest residential data for July showed that housing permits increased by 0.07%, housing starts increased by 3.86%, and housing completions decreased by -11.82%, In July, industrial production increased, coming in at 0.99%, overall data showed a strong underlying.

The coming weeks would be important as the Chinese central bank is expected to throw some surprises, which should see some recovery in Gold amid broader risk-off sentiments. From the US the Federal Reserve’s annual Jackson Hole symposium returns as the key event this week as Chair Powell kicks off the event with an economic outlook speech on Friday. Apart from that global calendar line-up of economic indicator releases will be light this week and would majorly focus on soft survey-based data

Global bond yields on the rise

The outperformance of the US has once again started the murmur talk of a soft or no landing in the US economy has become more common, The 30-year yield advanced as much as seven basis points to 4.42%, its highest in 12 years. The US 10-year yield climbed to as high as 4.33%, The equivalent UK yield jumped to a 15-year high, while its German counterpart approached the highest since 2011. India’s 10-year bond yields also rose to 4 months high and pushed the Indian rupee towards its weakest against USD.

Outlook
Gold is left with limited upside and we expect it to trade largely in the $1865-$1930 range. Any stimulus update could see a spurt of buying but we don’t see the sustainability of gold prices to stay higher.

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