Gold suffers loss of momentum amid dollar and yield strength

The latest weakness, leading to yesterday’s slump back below $2,000 was triggered by robust US retail sales data and together with sticky inflation and a still robust job market, traders have started to dial back expectations for rate cuts this year. From a peak near 1% at the start of the month, the June-December SOFR spread is currently pricing in a 0.67% cut this year, while a 1.75% reduction remains priced in during the next twelve months. 

Several Fed speakers were on the wires on Tuesday, and many pushed for more rate hikes. Thomas Barkin (non-voter) said he is still not convinced that inflation is defeated and would be "comfortable" with more increases. Loretta Mester (non-voter) said she thinks rates aren't yet sufficiently restrictive. Lorie Logan (voter) was neutral and noted that a slower pace and vouched for a slower pace considering stability risks. John Williams (voter) was less hawkish, highlighting that the demand and supply in the economy is moving back into a balance as Fed hikes filter through the economy. Clearly, most voters are turning cautious while the other members on the committee still see further interest rate hikes.

The table below shows gold’s recent weakness coinciding with a pick-up in US yields, some of which is being driven by the US debt ceiling debacle which ultimately could see the US run out of borrowing capacity. Negotiations are still ongoing and until a deal is struck, hopefully before the weekend, the dollar will remain bid, thereby adding some additional headwinds to commodities in general and precious metals in particular. 

Apart from the headwinds mentioned, gold’s potential biggest short-term challenge stems from its recent success in attracting demand from momentum focused hedge funds. Since early March hedge funds bought 122,520 lots of COMEX gold futures, and a deeper setback than the one already seen would likely trigger long-liquidation, not because these funds look for a change in direction but simply in order to reduce exposure while waiting for the next opportunity. Long-term focused investors using ETFs to gain exposure have been steady but not aggressive buyers of gold since March. During this time total holdings have risen by 72.5 tons to 2,923 tons but remain close to 400 tons below the recent peak from April 2022 and 525 tons below the record peak from October 2020.