The week ending December 8 was a tumultuous one for gold as the metal, on seemingly dovish Fedspeak, reached a fresh all-time high of $2,135 in the Asian session, before it closed lower the same day to consolidate for the rest of the week until Friday.
It slid further lower to close with a weekly loss of around 3.50% at $2,004. The yellow metal managed the first-ever monthly close above $2,000 in November on rallying bonds but failed to build on its sharp rallies.
Gold was smashed again Friday on a better-than-expected US non-farm payroll report for November, which weighed on the bonds to push the US yields higher. The US employers added 199,000 jobs in November versus the forecast of 185,000 jobs. The return of striking auto workers boosted the count by 30,000. Resolution of the Hollywood strike was also added to the payroll data. The unemployment rate edged lower to 3.70% from 3.90%.
The average hourly earnings rose 0.40% m-o-m versus the estimate of 0.30% as the y-o-y reading at 4% matched the forecast. Labor force participation rate improved to 62.80% from 62.70% in November, which may reduce the wage pressure inflation pressure. This decent monthly job report defies widely anticipated weakening in the job market, which means that the US Federal Reserve may hold rates higher for longer. The job report punches holes into the markets’ notions of a huge quantum of rate cuts next year. Swap contracts show that the probability of a Fed pivot in March has come down to 40% from over 50% observed before the release of the US nonfarm payroll data.
In another report released Friday, University of Michigan Sentiment (December preliminary) rose to 69.40 versus the forecast of 62. University of Michigan’s one-year inflation expectations (December preliminary) came in at 3.10% Vs the forecast of 4.30% as 5-10-year inflation expectations at 2.80% fell short of the expectation of 3.10%. The caveat with the job report lies in the fact that November payrolls were driven by just two sectors – viz. government and health care. On this basis, underlying conditions in the labour market are not as strong as they appear to be.
The ten-year US yields rose Friday on the US job report and closed with a weekly loss of around 2.50% at 2.23% as yields were up around 2% Friday, while the two-year yields were up by 3% to close at 4.72%. Meanwhile, the US Dollar Index at 103.98 was up 0.4% on Friday.
In a positive development for commodities in general, China’s leaders pledged to strengthen fiscal support and emphasise the importance of economic progress at a Politburo meeting held Friday. The Politburo announced that fiscal policy will be stepped up accordingly. The GDP target for the next year is expected to be 5%.Total global gold ETF holdings as of Thursday were up around 0.17 M Troy up on the week, though, overall, ETF demand remains lacklustre.
Next week’s major US data include CPI inflation (November), PPI inflation (November), retail sales advance (November) and S&P Global US manufacturing PMI (November). We also have the Federal Reserve’s monetary policy decision due on Wednesday. Out of the Eurozone, focus will be on Germany’s ZEW Survey expectations (December) and manufacturing PM and the Euro-zone’s manufacturing PM. The European Central Bank’s monetary policy decision is due on December 14. UK’s major data include employment, monthly GDP, manufacturing and composite PMIs. The Bank of England’s monetary policy decision is due on December 14. China will release its CPI inflation (November), home price, retail sales and industrial production (November) data next week.
As traders cut back on their hefty rate-cut wagers, US treasuries may fall further in the near-term, which means gold may be vulnerable in the near term as the metal has been rallying mainly on rate-cut notions. Gold is expected to fall further unless it gets support from the Fed’s monetary policy decision to be announced on December 13.
Support is at $1990/$1970. Resistance is at $2010/ and $2030) and $2053/$2970.
(The author is Associate Vice President, Fundamental Currencies and Commodities at Sharekhan by BNP Paribas)
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