Gold has become increasingly vulnerable in the last few weeks and is susceptible to further decline in prices.
The metal is subjected to mainly four bearish fundamental factors: Firstly, much expected Chinese demand on its reopening has failed to materialize. This is being seen in the hefty build-up in base metals inventories in the last six weeks. The continued decline in China’s PPI reflects weak demand. Weaker than expected Chinese demand is positive for the US dollar index, and is bearish for the commodities in general per se.
Secondly, ETFs inflows, which form the backbone of support for gold prices, have been missing. Notwithstanding the sharp rally in gold prices in January, the ETFs actually recorded a net outflow of 26 tons.
Thirdly, much stronger-than-expected US data like Q4 GDP, advance retail sales (February), ISM non-manufacturing (January), and US durable goods orders (December) have faded away the risk of a recession at least in the near term. Thus, expectations of a Fed pivot are being pared down.
Fourthly, the inflationary scenario doesn’t look much comfortable now. CPI January YoY and CPI core YoY came in hotter than forecast. Both core and headline PPI data for January beat the forecast. Gasoline and used car prices are rising as the ex-housing services component remains sticky. The Federal Reserve speakers continue to call for higher rates as they are all out to rein in inflation. Ms Mester is discussing the idea of a 50 bps rate hike is a case in point. The result is that US yields are sharply up from their cyclical low of 3.34% posted only a few days ago. The dollar index is surging. Now, the markets have started discounting the possibility of three further rate hikes of 25 bps each. Peak terminal rates are being seen around 5.50%, sharply up from 5.10% estimated previously.
Rising yields are bearish for gold which doesn’t pay any interest rates. Bond bulls are waking to the possibility of sharp rate hikes.
Spot gold closed with a loss of 1.20% on the week at $1843 as the US Dollar Index posted a gain of 0.20% on the week. The ten-year bond yields at 3.82% were up 2%.Gold is vulnerable in the near term as bears eye $1800 level. It won’t be surprising to see gold falling to $1730 should the factors discussed continue to remain in place. Resistance is at $1850/$1862.
(Praveen Singh – AVP, Fundamental currencies and Commodities analyst at Sharekhan by BNP Paribas.)
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