COMEX gold prices started the week on a negative note, following reports that US authorities are considering expanding an emergency lending facility for banks, easing some concerns surrounding the financial sector.

Risk sentiments improved and haven demand fell.

US Treasury Secretary Janet Yellen told lawmakers that regulators would be prepared for further steps to protect the banking system if warranted.

Overall, it was a risk-on week, as investors saw banking failure as an isolated event and under control.

Fed officials see more work on the inflation front, despite the recent banking turmoil, and continue to be hawkish in their statements.

Federal Reserve Bank of Boston President Susan Collins said the banking system is sound and more interest-rate increases are needed to bring down inflation.

Whereas, Federal Reserve Governor Philip Jefferson said the US central bank would try to avoid harming the US economy any more than needed as it confronts high inflation.“The current inflation rate is too high. It is the goal of the Federal Open Market Committee to get it back down to 2%, in a way that is sooner as opposed to later,” he told.

On the contrary, Federal Reserve Bank of Minneapolis President Neel Kashkari said recent bank turmoil has increased the risk of a US recession but that it was too soon to judge what it means for the economy and monetary policy.

Despite the hawkish comments from officials, the dollar index fell near to a two-month low of 102.1 levels.

On the economic data front, the US economy expanded an annualized 2.6% on quarter in the last three months of 2022, slightly less than initial estimates of a 2.7% rise.

At the same time, US weekly jobless claims rose by 7,000 from the previous week to 198,000 on the week ending 25th March, slightly above expectations of 196,000.

A decline in the greenback often translates to higher gold prices, however, this was more than offset by an uptick in US treasury yields amid improved risk sentiments.

March month is going to witness the first month of net inflows into gold ETFs after ten months of outflows. Holdings at the SPDR gold ETF rose to a six-month high as of 30th March.

Amid ongoing efforts for de-dollarization, heightened geo-political tensions, and stagflation concerns, central banks might also continue to be robust gold buyers into 2023. Retail demand is expected to take a hit as prices are hovering near record highs.

During the March FOMC meeting, the Fed chair acknowledged that they are nearing an end to the rate hikes in this cycle.

Money markets are expecting Fed to pause rates during the May FOMC meeting, with less than 10 bps of hikes priced in for the same. However, recent ease in banking sector fears and hawkish comments from Fed officials have also brought down rate cut expectations to 50 bps by year-end, limiting the upside in bullion.

US Manufacturing PMI and Labor data might be in the spotlight for the coming week, as the official Manufacturing PMI has been in contraction for the past four months.

US Non-farm payrolls are expected to cool down for March month and gold prices are expected to stay buoyed on the back of a weak dollar and prospects of a Fed pivot.

Having said that, in the event of any upside surprise in data, markets might start pricing in a 25 bps rate hike for the May meeting, which might prove to be a short-term headwind for the yellow metal.

(The author is VP-Head Commodity Research, Kotak Securities Ltd)

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