Gold gave back some ground over the past week

Gold gave back some ground over the past week in consolidative price action following the 7.0%+ recovery from its late-July lows. An ebb in geopolitical tensions lessened safe-haven demand for the yellow metal, leaving its direction mostly dictated by the US dollar, which strengthened and so added some downside impetus to likely profit-taking after the recent rebound. US Treasury yields were little changed so a nonfactor. In the week to Thursday’s close, gold lost 1.8%, leaving it -3.9% this year (spot ref.: $1,758).

China kicked off the week with July data that did little to allay concerns around growth prospects in the world’s second-largest economy. Fixed asset investment, industrial production and retail sales were all not only lower on a year-over-year basis than in June, but also weaker than the consensus had expected. What’s more, house prices fell at a quicker pace, -0.9% y/y in July compared to -0.5% y/y in June, and so underscored the country’s property market as a chief source of concern. A close second is COVID-19 with various cities announcing impromptu lockdowns in an attempt to contain infections.

Arguably motivated by the weak data but a move nonetheless unexpected by markets, the People’s Bank of China on Monday cut its one-year policy loan rate 10bp to 2.75%; the PBoC also lowered its 7-day reverse repo by 10bp, to 2.0%. A day later, China’s state TV reported that Premier Li Keqiang encouraged provincial officials to step-up efforts to improve growth by, for example, issuing bonds to fund investments. Despite the combined efforts of the PBoC (monetary) and the government (fiscal), most analysts foresee China’s economy struggling to make much headway over the remainder of this year. Over the past week, China’s 10y bond yield eased 10bp to 2.64% and the yuan slid 0.9% versus the US dollar. Mainland equity indexes managed gains of about 1.5%.

Bloomberg, citing Swiss customs data, on Thursday reported that China imported more than 80 tons of gold from Switzerland in July, up significantly from prior months and the most in 5+ years. This could suggest strong demand in an important market for gold.

The US Dollar Index recouped all the ground lost last week and then some. While its 2.2% weekly advance likely owed to relative policy expectations (Fed vs. other central banks) idiosyncratic issues for other currencies surely played roles, too. In the Eurozone (EURUSD -2.0%), for example, and aside from ongoing/rising concerns around energy supplies, the ZEW barometer of economic sentiment for August fell to -54.9, its lowest reading in more than a decade. Double-digit UK inflation (discussed later) and feeble growth weighed on sterling (GBPUSD -2.4%). Less demand for safe-haven currencies contributed to weakness in the Swiss franc and yen (USDCHF +1.5%, USDJPY +2.3%).

In the week to Thursday’s close, the nominal 2y US Treasury yield was down 1bp to 3.22%, the 5y +4bp to 3.02%, and the 10y +1bp to 2.88%. Real Treasury yields (TIPS) were also mixed, the 5y +1bp to 0.32% but 10y -4bp to 0.36%. Breakeven inflation rates (BEI) correspondingly firmed, the 5y by 3bp to 2.70% and the 10y by 5bp to 2.52%.

The minutes to the July 26-27 FOMC meeting released on Wednesday didn’t really alter market expectations for the Federal Reserve’s policy path much. One the one hand, and echoing what Chair Powell said at his post-meeting press conference then, officials saw potential for downshifting “…the pace of policy rate increases” at some point to assess the impact. On the other hand, however, were assertions such as “participants continued to anticipate that ongoing [rate hikes] would be appropriate”, and “moving to a restrictive stance of policy was required to meet the [Fed’s maximum employment/price stability dual mandate]”. As at Thursday’s close, the CME Fed Watch Tool showed the probability of a 75bp hike next month at 60.5%, and the probability of +50bp at 39.5%

Canada on Tuesday reported July CPI down to 7.6% y/y from 8.1% y/y in June. On a monthly basis CPI firmed just 0.1% (+0.7% in June). Much of the drop owed to lower gasoline prices (-9.2% m/m), as was the case with the drop in US July CPI last week. However, the average of all three of the Bank of Canada’s core CPI measures (trim, median, common) reached a record high of 5.3%, suggesting little improvement ex-energy. In an op-ed in Canada’s Financial Post the same day, BoC Governor Macklem wrote “…our job is not done yet – it won’t be done until inflation gets back to the two-per-cent target.” Canada’s 10y yield rose 8bp to 2.86% w/w. USDCAD gained 1.4%.

UK July CPI reported on Wednesday, by contrast, surged to 10.1% y/y, up from 9.4% y/y in June and a new four-decade high. Even loftier heights for CPI could be in store, as the Bank of England earlier this month projected it to peak over 13.0% in October. UK yields surged as well, 2y by 43bp to 2.44% and 10y by 24bp to 2.30%, on the week.

Brent and WTI crude oil prices recovered from intraweek lows but still had another down week, losing 0.9% and 1.4%, respectively. The oil market appears caught in an ongoing tug-of-war between supply and demand views. Bulls see prices going higher because of Russia-related and production constraints amid strong demand. Bears, by contrast, see potentially more supply were a new nuclear accord with Iran worked out, as well as the possibility of so-called demand destruction were rate hikes across the globe (ex-China) to slow growth. New OPEC Secretary-General Al-Ghais in a Bloomberg TV interview Wednesday expressed optimism about China’s oil demand once it fully reopens. He also warned that OPEC’s limited spare production capacity could result in “squeeze”.

The central bank of Türkiye (CBRT) on Thursday resumed its unorthodox monetary policy by cutting its one-week repo rate 100bp to 13.0% despite sky-high inflation. CPI, which ended 2021 at an already-high 36.08% y/y, has more than doubled this year, reaching 79.6% in July. This was the first rate move by the CBRT since last December (-100bp). USDTRY rose about 0.8% on the day, leaving it up roughly 35.0% this year. Like China, Türkiye is also an important market for gold and so bears close monitoring.

The Gilded Glimpse will take a brief hiatus – no edition Aug. 26 – and resume Sept. 2.