Fundamental Analysis

Gold on Track for Fifth Consecutive Weekly Gains

  • Data released on Wednesday revealed that US producer prices declined.
  • Americans submitting new claims for unemployment benefits unexpectedly decreased.
  • Permits for new construction in the US fell to a more than 2-1/2-year low.

Gold dipped on Friday as the dollar strengthened. However, it was still on track to post a fifth straight weekly gain as optimism over a slower pace of US interest rate increases raised the demand for bullion.

According to a Reuters poll, the US Federal Reserve will complete its tightening cycle after raising interest rates by 25 basis points at each of its upcoming two policy meetings. It will likely hold rates unchanged for the remainder of the year.

“Although slightly weaker, gold is still trading close to previous highs. A major aspect supporting the performance of gold is the Fed’s theme of policy calibration amid signals of more pronounced disinflation pressures, “Christopher Wong, an OCBC FX strategist, said.

Data released on Wednesday revealed that US producer prices declined more than anticipated in December, proving that inflation was declining and, consequently, supporting wagers that the Fed will scale down rate increases.

According to IG Market researcher Yeap Jun Rong, “Gold may reach $2,000 this year, but for that, we need to witness a downshift in aggressive tone from the Fed to corroborate current market rate hike forecasts.”

US unemployment claims (Source: US Labor Department)
US unemployment claims (Source: US Labor Department)

Despite efforts by the Fed to slow demand for employees, the number of Americans submitting new claims for unemployment benefits unexpectedly decreased last week. This signals another month of strong job creation and tightness in the labor market.

For the week ending January 14, the number of first claims for state unemployment benefits decreased by 15,000 to 190,000 (seasonally adjusted), the lowest level since September. Economists had predicted 214,000 claims.

Separate data released by the Commerce Department on Thursday indicated a recovery in single-family homebuilding in December. However, permits for new construction fell to a more than 21/2-year low, signaling potential weakening as tighter monetary policy chokes the housing market.

The industrial news was also depressing. According to a poll by the Philadelphia Fed, mid-Atlantic industry activity has remained weak this month. This week’s figures on the nation’s factory production showed that December saw the greatest decline in almost two years.

As the US economy slows, bets for a less Fed hikes go up. Investors may favor zero-yield gold since lower rates translate into reduced returns on interest-bearing assets.