Gold drifted lower over the past week, failing to capitalize on a 0.7% pullback in the US Dollar Index and lower US Treasury yields

Gold drifted lower over the past week, failing to capitalize on a 0.7% pullback in the US Dollar Index and lower US Treasury yields. It was apparently undermined instead by general weakness in the commodity space, which reflected growing fears that tighter monetary policies around the globe aimed at taming widespread inflationary pressures could, in turn, have adverse – perhaps recessionary – consequences for growth. Gold lost 1.8% in the week to Thursday’s close, putting it -0.4% this year (spot ref.: $1,823).

Growth-sensitive commodities fared worse than gold, which, despite featuring in industrial applications such as electronics, is, of course, more closely associated with its ornamental (jewelry) and financial (investment) uses. Oil prices were at the fore of weakness in commodities, with Brent crude down about 7.0% and WTI losing almost 10.0% over the week. Aside from equating the prospect of slower growth with less demand for crude (and products), the oil market also seemed wary about demand from China with Covid-related mobility restrictions in several major cities not yet fully relaxed. Along the same worry lines, the growth-sensitive Australian dollar tumbled about 1.5% versus its US counterpart, even with RBA Governor Lowe on Tuesday suggesting that continuity of its tightening cycle would mean another rate hike of 25bp or 50bp in July.

Lower oil prices naturally weighed on so-called petrocurrencies, although mitigating factors prevented steeper losses. That the Canadian dollar lost just 0.7% versus the greenback may have owed to expectations that the Bank of Canada might ratchet-up the magnitude of its rate hikes given the Federal Reserve’s +75bp move last week; since commencing tightening in March, the BoC has hiked 25bp once and 50bp twice. Favorable CAD yields versus USD equivalents may have cushioned the blow from lower oil prices, as well. For example, the CAD 10y vs. US 10y spread of around 26bp (CAD over) is at its highest level on data back to 2015. A 50bp rate hike from Norway’s central bank on Thursday, twice the 25bp expected, appeared to backstop the krone, with USDNOK up just 0.2% over the week. EURNOK gained more, roughly 1.0%, but that was more a consequence of a firmer euro. EURUSD gained 0.8% over the week.

Metals more closely associated with industry/growth than gold also lost ground. Silver shed a little over 3.0% on the week. The white metal is used in solar technology, as well as in electronics because of its superior conductivity. Platinum, which is used in catalytic converters (and electronics), also lost a little more than 3.0%. Copper, which is viewed as a barometer for economic activity because of its many industrial uses, lost almost 10.0%. Copper has been in a bear market (-20.0% from its highs) since late May.

Purchasing Managers Indexes (Markit) for June fed the growth-concern narrative. For example, the Eurozone Composite PMI fell to 51.9 (cons.: 54.0) from 54.8 in May, and Germany’s Composite PMI to 51.3 (cons.: 53.1) from 53.7 in May. France’s Composite PMI was down to 52.8 (cons.: 56.0) from 57.0 in May. US PMIs told a similar story: Composite 51.2 vs. 53.6 in May, Manufacturing 52.4 vs. 57.0 and Services 51.6 vs 53.4.

Coming as it did just a week after the June FOMC meeting, Federal Reserve Chairman Powell’s semiannual testimony before Congress didn’t make too many waves. But what he did say about economic prospects didn’t calm markets’ nerves, either. In line with markets’ suspicions, Chair Powell did acknowledge that a recession was possible, and in doing so injected a caveat into his prior assertions about strength in the US economy. Technically speaking, the bar to a recession – two consecutive quarters of negative GDP by the classic definition – could be low considering the -1.5% q/q annual rate in Q1 and the Atlanta Fed’s latest (June 16) GDPNow estimate for Q2 having fallen to 0.0%. Powell reiterated determination to follow through with more rate hikes to get inflation down, but was noncommittal on their magnitude. Last Saturday, Fed Governor Waller said he would be in favor of another 75bp hike at the July 26-27 FOMC meeting. His colleague Fed Governor Bowman put herself in that same camp in a speech Thursday.

Growth fears nevertheless trumped the hawkish Fedspeak and US Treasury yields fell. In the week to Thursday’s close, the nominal 2y yield was -13bp to 3.01%, 5y -21bp to 3.14%, and 10y -19bp to 3.09%. Real Treasury yields (TIPS) softened as well, the 5y by 3bp to 0.45% and 10y by 7bp to 0.59%. At Thursday’s close, the CME Fed Watch Tool showed the probability of a follow-on 75bp rate hike at the July FOMC at 96.9%.

While arguably good news of sorts for the Fed, the recent pullbacks in US breakeven inflation rates (BEI) haven’t been doing gold any favors. As at Thursday’s close, the 5y BEI was 2.69% vs. a peak of 3.59% on March 25, and the 10y BEI 2.50% vs. a peak of 3.02% on April 21. Likewise, the 5y5y Forward Inflation Expectation Rate: 2.31% vs. a peak of 2.67% on April 21. (Source: Federal Reserve St. Louis data, all closing bases). ???

Yields in other major global bond markets followed suit from Treasuries, with Germany’s 10y -26bp to 1.44% and France’s -28bp to 1.98%. Switzerland’s 10y yield fell 26bp to 1.22% and the franc gained 0.6% versus the dollar. Japan’s 10y JGB yield edged 3bp lower to 0.22%. USDJPY rose 0.8%. The UK’s 10y yield slid 22bp to 2.3%, even with UK May CPI on Wednesday reported at 9.1% y/y vs. 9.0% in April. Last week the Bank of England forecast CPI to top 11.0% in October. GBPUSD firmed 0.7% on the week.

China’s mainland equity indexes finished the week up about 2.0%, buoyed again by hopes for stimulus. President Xi Jinping on Wednesday pledged to “strengthen macro-policy adjustment” (source: Xinhua). A day earlier, Finance Minister Liu Kun said policies aimed at boosting growth were being looked into (source: Xinhua). On Monday, however, the People’s Bank of China refrained from cutting its 1y and 5y prime loan rates. USDCNY slipped 0.2% on the week. India’s BSE Sensex and Nifty 50 gained a little over 2.0% amid improved sentiment. USDINR was flat around all-time highs.

Reuters on Tuesday reported that the European Union was considering including gold in a possible next round of sanctions on Russia. In what manner was unclear, however.