Gold likely to be volatile next week as concerns over US CPI data loom

Gold closed with a gain of nearly 0.70% in the week gone by, erasing steep losses made on Federal Reserve Chair Powell’s hawkish testimony. It ended the week at $1867.24.

Gold gained on worries about the US banks as Silicon Valley Bank defaulted, which led to spillover concerns. Some softer than expected data in the US nonfarm payroll report for February also boosted the metal.

Much awaited US nonfarm payroll report for February showed that the US employers added 311k jobs as against the forecast of 205k jobs.

While headline figure was impressive, which showed that US labour market is still strong, rise in unemployment rate to 3.6% as against the expectations of 3.40% and average hourly earnings coming in at 4.6% y-o-y as against the forecast of 4.70% y-o-y took some sheen off the job report.

In addition, labor force participation rate inching higher to 62.50% in February from 62.40% in January also helped in assuaging concerns regarding tight job market to some extent.

Silicon Valley Bank (SVB) has been shut down by regulators, and Federer Deposit Insurance Corporation (FDIC) has been named as the receiver. The Bank’s failure saw the investors fleeing to the safety of US treasuries and gold.

The metal benefited from sharp decline in both the short-end and long-end yields. SVB is the largest US bank to fail since Washington Mutual during the height of the global financial crisis (GFC) in 2008.This episode is reminiscent of the crumbling financial system during the GFC, thus investors have been spooked by this Bank’s default.

US 10-year yields tumbled around 7% on the week as the yields settled at $3.704%. Now the markets are looking for a 25 bps cut in the Fed fund rate by the end of the year as the possibility of a 50 bps hike at the next FOMC meet fades.

Notwithstanding a steep decline in the ten-year yields, the US Dollar Index closed with a weekly gain of 0.10% at 104.62.

Gold is likely to find good support on credit risk concerns next week; however, the metal may give back some of the risk premium in case the US Banking sector troubles look contained.

Next week, apart from monitoring the credit contagion risk, investors will also focus on the US CPI inflation data due Tuesday. As Mr Powell has made rate hikes to be data dependent, we are likely to see huge volatility next week emanating from the US inflation data.

Subdued inflation may help gold to test resistance at $1900. Support is seen at $1850/$1830.

Gold closing over the stiff resistance at $1862 is positive for the metal.

(The author is AVP, Fundamental currencies and Commodities analyst at Sharekhan by BNP Paribas)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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