After days of mixed trade near the $1850/oz level, gold edged up and tested the highest level since early May indicating that bulls are becoming more active.

However, with a late-week sell-off, it ended with a minor decline for the week, it’s first in three weeks.

Gold bulls became active amid increased volatility in the US dollar. The US dollar index slipped to a 5-week low earlier this week but bounced back sharply and then noted mixed trade support for the US jobs reports.

The US dollar has turned volatile as market players assess the monetary policy stance of the Fed as well as other central banks.

The US Fed is largely expected to continue with a 50 basis points rate hike but market players are trying to assess if the central bank may reduce the pace of tightening to avoid any negative impact on the economy.

Fed officials have largely maintained a hawkish stance however mixed economic data has caused some nervousness. Data released this week showed that consumer confidence was still strong while manufacturing PMI improved.

Jobs data was mixed as the ADP jobs report noted a much smaller than expected rise in private-sector jobs while the non-farm payrolls report noted a bigger than expected jump in jobs.

Other central banks are also under pressure to act to get inflation under control. Euro-zone consumer prices rose at a record pace last month adding to market expectations that ECB may act soon.

A bigger than expected jump in Swiss consumer prices has also added to expectations that the central bank may act to control prices.

Bank of Canada raised its interest rate by 0.5% for the second consecutive time this week and signaled more hikes in the coming months.

The US dollar index has lost momentum as the market focus has shifted from the US Fed to other central banks; however, a sustained decline in the US currency may come only if the US central bank alters its monetary policy stance and indicates slower rate hikes.

Gold gained traction as inflation concerns rose amid increased volatility in the energy prices. Crude oil jumped to March highs as European leaders decided on a phased-out partial ban on Russian crude exports.

But Crude lost momentum as OPEC and allies decided to fasten the pace of production hikes.

Commodities in general benefitted from optimism about the Chinese economy and this helped gold as well. Optimism about the Chinese economy rose as Shanghai lifted virus-related restrictions after two months of lockdowns.

Manufacturing and services PMI data also showed some improvement in economic activity. China however continues with its zero COVID policy and may take a gradual approach to reopening of the economy.

While gold has recovered sharply from recent lows, ETF investors lack confidence.

Gold initial rise saw active participation by ETF investors; however, buying slowed as price moved above $1850/oz levels and we have seen some net outflows lately.

Increasing uncertainty about gold’s price outlook has made ETF investors price sensitive.

Central banks may remain in focus in the near term as ECB’s monetary policy meeting on June 9 will be followed by Fed decision on June 15.

The recent rise in euro against the US dollar shows that ECB is largely expected to take a hawkish stance at the upcoming meeting.

Market expectations are showing a higher possibility of a hike in July and the meeting next week will be parsed for more clarity on the same.

If ECB fails to give any fresh impetus to current tightening expectations, euro may struggle to gain.

At its meeting later this month, Fed is largely expected to raise the interest rate by 0.5% and this has been factored in. Market players may be looking at economic and interest rate projections to gauge when the central bank may alter its stance.

Gold is building on current momentum and is gaining support from choppiness in the US dollar and increasing challenges to the global economy however any major upside will be challenged by the monetary tightening stance of major central banks.

(The author is Associate Vice President – Commodity Research at Kotak Securities)

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