Weekly Gold Market Review: Gold prices fluctuated and fell, pressured by positive US economic outlook and rising US Treasury yields

Gold prices fluctuated and fell during the week of Friday, August 11. A positive outlook for the US economy and rising US Treasury yields supported the US dollar, putting pressure on gold prices. However, many analysts remain optimistic about the future prospects of gold prices. Looking ahead to next week, key focuses include central bank activities, including the minutes of the Federal Reserve and the Reserve Bank of Australia. With increasing geopolitical tensions, the trilateral summit between the US, Japan, and South Korea will also be closely watched. Data-wise, several countries and regions will release quarterly GDP and CPI data. Given the global tightening and economic uncertainty, data performance may influence central bank policy prospects. Next, let's review some of the news events that affected gold price trends this week to provide a basis for predicting the future. A positive US economic outlook supports the US dollar, putting pressure on gold prices After raising interest rates by 525 basis points in less than a year and a half, the market increasingly believes that the end of the US tightening cycle is approaching, and this week's US inflation data may add credence to this expectation. Data shows that US core CPI rose 4.7% year-on-year in July, the smallest increase in nearly two years. Slowing inflation, coupled with a cooling job market, has strengthened analysts' confidence that the Federal Reserve is likely to achieve a soft landing for the economy and avoid a recession. While inflation is falling, employment and wages remain strong. The prime-age labor force participation rate is near its historical high, while the unemployment rate is near its lowest level in half a century. According to a report released last Friday by the US Bureau of Labor Statistics, the US economy added 187,000 jobs in July. At the same time, average hourly earnings rose by about 4.5% year-on-year, meaning that wages are rising faster than prices, allowing workers to recoup some of the purchasing power lost due to post-COVID inflation. Fed policy remains uncertain. Discussions within the Federal Reserve about the outlook for interest rates reveal some differing views. San Francisco Fed President Daly said it's too early to say whether the Fed has done enough on interest rates. New York Fed President Williams believes that the Fed is very close to the peak interest rate and expects rate cuts to begin next year. Ryan Brandham, head of global capital markets for North America at Validus Risk Management, said: "Inflation is returning to target and the labor market is slowly cooling. But the FOMC wants to see more data before deciding in September whether progress is fast enough to justify pausing rate hikes, or whether the balance of risks suggests another rate hike is needed to ensure the inflation target is met." Traders of federal funds futures believe that the probability of the Fed raising the benchmark overnight rate from the current 5.25%-5.50% range at its September policy meeting is less than 10%. The Fed's next likely move is to cut rates in May 2024. US Treasuries are sold off, rising yields support the dollar and put pressure on gold prices The rise in US Treasury yields is due to the Fed raising borrowing costs to curb inflation and increasing bond supply to cover the US budget deficit. Since the beginning of last year, the Fed has raised its benchmark interest rate by more than five percentage points, exacerbating market concerns about a potential recession and damage to corporate earnings. The results of the Treasury's $23 billion auction of 30-year bonds on Thursday showed a winning rate of 4.189%, lower than the market rate, with a bid-to-cover ratio of 2.42 times, lower than expected market demand. In addition, the Federal Reserve System Open Market Account bought $8.6 billion in 30-year bonds; previously, the US Treasury's auctions of 10-year and 3-year bonds on Wednesday and Tuesday showed strong demand. Jeffrey, a rate strategist at Bank of Montreal Capital Markets, said the $23 billion auction of 30-year US Treasuries on Thursday afternoon was "weak," leading to a moderate sell-off in the longest bonds. At the close, the yield on 2-year US Treasuries rose 3 basis points to 4.821% from 4.79% on Wednesday, and the yield on 10-year US Treasuries climbed 9 basis points to 4.081%. US Treasury data shows that the yields on 2-year and 10-year US Treasuries on Thursday were the highest in a week, and the yield on 30-year US Treasuries rose 6 basis points to 4.24% from 4.18% at the end of Wednesday. The yield spread between 2-year and 10-year US Treasuries narrowed by 6 basis points to 73 basis points, with a weekly high of 79 basis points and a low of 67 basis points. The average spread in mid-to-late July was as high as 90 basis points. Loyola Marymount's chief economist, SS Economics, said, "The job isn't done, but significant progress has been made on inflation. Overall, the inflation situation has improved significantly. The Fed will soon stop raising interest rates." Analysts remain optimistic about the long-term outlook for gold prices Bart Melek, managing director and global head of commodity strategy at TD Securities, said: "I do believe gold will rise to trading levels above $2,100 by the end of 2023 and early 2024." He attributes his optimism to the potential pause in the Fed's tightening cycle. "I'm optimistic about gold because I believe the Fed will move policy away from its current restrictive mode. I believe this will happen before the 2% inflation target is reached," Melek told CNBC in an email. David Neuhauser, founder of Livermore Partners, said: "My target is $2,500 by the end of 2024... This is largely related to the power of a recession potentially dominating from later this year and gaining momentum in 2024." "In 2024, I'll see gold break through and hit new highs and even higher." Neuhauser said he expects the global economy to experience persistent stagflation in the coming years, with inflation rates falling to 3% to 5%. "I'm very confident that within a few years, we'll see gold prices reach $2,500," said Randy Smallwood, CEO of Wheaton Precious Metals. "Any type of recessionary move is good for gold," he said, adding that he sees weakness in both the Chinese and US economies. DBS Bank also predicts that gold prices will hit a new record, but not until the second half of 2024. "The main drivers of our positive outlook for gold are the expected peak of the Fed's rate hike cycle and the impending peak of the strong dollar," Heng Koon How, head of market strategy, global economics and market research at the bank, said in an email. He explained that gold prices should rise when interest rate hikes stop and the dollar depreciates. Analysts expect a rebound in Chinese and Indian retail spending to support physical gold purchases Analysts point to "continued strong" central bank purchases of gold, along with consumer demand for the precious metal. We are also seeing a rebound in physical gold jewelry demand in China and India as the economies of both countries stabilize and retail spending picks up. Citi said in a July report that Chinese retail gold demand remained resilient in 2023 despite weak consumption of other commodities. Analysts led by Citi's head of commodity strategy, Aakash Doshi, said in the report that Chinese gold jewelry demand in the first quarter "was slightly below 200 tonnes, the strongest seasonally since 2015." Citi expects China's jewelry demand to exceed 700 tonnes this year, a year-on-year increase of 22%. Wheaton's Smallwood said he's seeing an increase in consumer and retail demand. "Whether it's jewelry, bars, coins. We've seen a pickup in that area," he said. Nicky Shiels, head of metal strategy at precious metals company MKS PAMP, said physical demand for gold has recovered in some regions, and central bank demand for gold remains strong. She said: "Emerging market central banks will continue to de-dollarize and use gold as an alternative to further Western sanctions."

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