A week loaded with economic data

Gold prices soared to record highs, with spot gold reaching a new peak of $2,4450.00 per ounce on Monday last week. Silver also hit its highest levels in several years earlier last week

However, Gold prices steadied in Asian trade on Friday, with traders remaining wary of the yellow metal before key U.S. inflation data that is likely to factor into the outlook for interest rates.

Metal markets saw some relief on Friday after the dollar slid from over two-week highs in overnight trade, tracking weak gross domestic product figures. But this relief was limited, as fears of sticky inflation and high interest rates persisted before key inflation data.

Spot gold steadied at $2,342.86 an ounce, during trading hours. The yellow metal was still set to gain about 2.6% in May, after it shot up to record highs earlier in the month.

A string of Federal Reserve officials warned in recent weeks that the central bank had little confidence to begin trimming interest rates, amid sticky inflation.

This put PCE price index data- which is the Fed’s preferred inflation gauge- squarely in focus.

The latest data has increased the probability of a rate cut by the September Federal Open Market Committee (FOMC) meeting. According to the CME’s FedWatch tool, the probability of a rate cut by September has risen from 50.5% yesterday to 53.2% today. The likelihood of a 0.25% rate cut increased from 45.1% to 46.6%, while the chances of a 0.5% cut rose from 5.4% to 6.6%.

High-for-longer interest rates bode poorly for gold and other precious metals, given that they push up the opportunity cost of investing in the space.

While gold and silver prices suffered setbacks last week, there are strong reasons to believe that both precious metals could find the wind at their backs during the current week, with long-awaited rate cuts and the risk of a U.S. employment downturn on the docket.

And the winds may be shifting for gold as well, with signs that investors outside of China are finally warming to the yellow metal.

 While geopolitical risks continued to boost demand for safe havens, the astonishing rise in gold demand in China in the first quarter of 2024 largely contributed to the price increase.

 Investment demand for physical gold in China has been the primary source of strength for the precious metal over the past month.

This week promises a return to a more normal rhythm of economic news releases, with several major highlights that have the potential to propel metals prices higher.

Monday – The S&P global manufacturing PMI and the ISM manufacturing PMI for May.

Wednesday – The Bank of Canada will announce its interest rate decision, with economists predicting a quarter-point cut, and shortly afterward, markets will receive the ISM services PMI for May.

Thursday – The ECB interest rate decision, with markets priced in for a 25 basis point cut to the benchmark interest rate, along with weekly jobless claims.

Friday – Morning brings the release of May’s nonfarm payrolls report.

Should both central banks deliver the expected rate cuts, and should the May employment report disappoint to the downside, markets may quickly recalculate the timing and the scale of the Federal Reserve’s easing rate path.

Lower interest rates tend to benefit gold prices in the long run, as gold does not yield interest, and higher rates typically weigh on the precious metal’s appeal. Despite the recent dip in gold prices, the metal managed to close out May with a nearly 1% gain, benefiting from the prospect of easier monetary policy ahead.

Gold ratesis proving its role of maintaining purchasing power during periods of economic and political uncertainty and social upheaval. Geopolitical concerns, a growing sovereign debt crisis, and evidence of stagflation setting in have been the principal drivers for gold, and now silver, entering a new bull market.

Although gold has currently retreated from these record levels, they remain close, with analysts expecting prices to rise over the next 12 months.

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