Gold suffered heavy losses in the first half of the week and dropped to its weakest level since September 2021. Gold lost more than 3% on a weekly basis in international markets, but due to import duty hike, it’s almost unchanged in domestic levels.
Important events/news that impacted the precious metals this week:
• Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), stated that the global economy has “darkened dramatically” since April and that given the higher risks, a global recession cannot be ruled out for next year.
• In domestic markets, it was announced that the basic import duty on the precious metal had been hiked to 12.5 percent from 7.5 percent, further clouding gold’s demand picture.
• Meanwhile, according to the minutes of the FOMC’s June policy meeting, participants agreed that strong inflation justified tight interest rates, with the possibility of a more stringent approach’ if inflation continued.
• The US Dollar Index achieved its highest level in over 20 years above 107.00, propelled by the Fed’s hawkish tone and the furious flight to safety, causing XAUUSD to remain on the back foot.
• It’s official: there is an equity bear market! The S&P 500 Index fell more than 20% last month from its historic high of 4797 points in early January 2022.
• The US Bureau of Labor Statistics (BLS) reported that nonfarm payrolls increased by 372,000 in June, exceeding the market’s expectation of 268,000.
• The high Payroll figure not only keeps the focus on the 75bps move in July, which now appears to be a done thing, but it also suggests that we may see a similar 75bps move in September, particularly if we receive a strong CPI number next week. This has been mirrored in US treasury yields, with the 10-year yield rising back above 3% and the 2-year yield rising beyond 3.15%, though both have since fallen down from their intraday highs.
This week, gold prices have been pushed down by rising US yields and a stronger US dollar. Prices have attempted to recover in recent days, but today’s payrolls figure has limited the gains, while a large US CPI number next week might send the yellow metal back to this week’s lows.
Equity bear markets that precede recessions are often beneficial to gold. The relationship, however, is more complicated than one might assume. Gold fell alongside the stock market in 2000-2001, eventually bottoming out in April 2001, one month after the S&P 500 entered a bear market. The stock market then began a multi-year rally that halted in March 2008, in the midst of the Great Recession. By November 2008, gold had continued to fall, falling in lockstep with the stock market, albeit to a lesser level. Only then did it begin its spectacular surge. A similar pattern occurred in 2020: during the pandemic March, gold fell alongside the S&P 500, albeit to a lower level, and then began to rise quickly after the initial dip.
This means that the gold market may be nearing its bottom. If there is an asset sell-off as investors scurry for cash to meet obligations and satisfy margin calls, the yellow metal might fall even further. However, once the crisis is passed, gold should shine. Rising interest rates may continue to put downward pressure on the yellow metal for some time, but when they do, gold will have a wide-open field to run in.