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The erosion of the geopolitical risk premium does not favor the appeal of gold

The gloomy monthly employment report in the United States and data from ISM services caused the US yields and therefore, the US Dollar clue, which propelled the gold prices over $2,000. However, diminishing geopolitical concerns led to a decline from the day’s high. Spot gold closed with a 0.36% gain at $1,992.72. It was down for the week despite a sharp decline in U.S. yields and the U.S. dollar index, showing that some of the important geopolitical risk premium built into prices is disappearing.

US Secretary of State Blinken, during his visit to Israel, supported Israel’s right to defend itself, but he also pressed for a humanitarian pause in the ongoing war between Hamas and Israel, saying they should do more for the Palestinians. At the same time, Hezbollah’s Nasrallah claimed he had no advance information about Hamas’ attack on Israel. These developments pushed gold below $2,000.

The yellow metal is down 0.60% over the week. US ten-year yields fell from 1.82% to 4.58% on Friday and by almost 6% over the week. Likewise, two-year yields fell from 3% to 4.84% over the week. The US dollar fell 1.07% to 105.06 on Friday after posting a weekly loss of around 1.50%. It is worth noting that the dovish FOMC results also contributed to lower US yields and the dollar index.

US data released on Friday was disappointing as US employers created fewer jobs than expected in October and the US ISM services index was below forecasts. The latest US economic publications suggest that the series of positive surprises in US data is losing momentum, justifying the US Federal Reserve’s wait-and-see stance.

U.S. employers added 150,000 jobs in October, compared to a forecast of 180,000, while the unemployment rate rose to 3.90% from the previous figure and forecast of 3.8%. The two-month net payroll revision was -101,000 jobs. The average MoM hourly wage stood at 0.20% versus the estimate of 0.30%, while the year-on-year data at 4.10% was above the forecast of 4% but below the September figure of 4.20%. The labor force participation rate fell slightly from 62.80% to 62.70%, and was lower than the forecast of 62.80%, which will put upward pressure on wage inflation. The ISM Services Index (October) came in at 51.80 versus the estimate of 53, although paid ISM service prices came in at 58.60, which was higher than the estimate of 56 .60. The employment index fell to 50.20 from 53.40 in October, although the new orders index improved to 55.50 from 51.80.

US data released earlier in the week was mixed: ISM manufacturing in October was noted at 46.70 versus the forecast of 49; Conference Board Consumer Confidence, at 102.60, beat the forecast of 100.50, although it was lower than the previous month’s revised reading of 104.30; house prices rose more than expected in August; The employment cost index (T3) at 1.10% was higher than forecast by 1%; factory orders in September exceeded forecasts; Initial jobless claims rose more than expected. Elsewhere, European data showed German GDP fell 0.10% from the -0.20% estimate, Germany CPI inflation data cooled 0% YoY monthly against 0.30% in September and 3.80% against 4.50% year-on-year while unemployment increased by 30,000 against 30,000. the 15K forecast.

The eurozone unemployment rate rose slightly to 6.50% from 6.40% in September, while GDP stagnated in the third quarter on a quarterly basis, while it only increased by 0.10% year-on-year. Manufacturing activities continued to contract in Germany and the eurozone. The UK’s manufacturing sector contracted faster than expected, although the services PMI contracted at a slower pace than expected. China’s manufacturing sector contracted unexpectedly in October. Three major central banks concluded their monetary policy meetings this week. The Bank of Japan maintained its ultra-accommodative monetary policy, while adjusting its YCC band by allowing 1% as a reference point for ten-year yields. The markets, however, were not impressed. As expected, the Bank of England kept its key rate unchanged; However, its forecast for next year was gloomy, as the Bank expects no growth next year, compared to a previous estimate of 0.50%, while unemployment is expected to rise. The US Federal Reserve has kept its rate unchanged as it sees high yields and tighter financial conditions as reducing the need for a hike in the near term. Even though the Fed kept its rate hike options open, markets treated the FOMC decision as dovish, weighing on yields and the U.S. Dollar Index.

Next week, investors will focus on University of Michigan Sentiment (November Prelims) and University of Michigan Consumer Inflation Expectations. Outside Europe, focus will be on Germany and Eurozone Composite and Services PMI, Germany Final CPI (October), Eurozone Retail Sales euro and UK GDP (preliminary third quarter). China’s trade balance and new yuan lending data will also be released next week.

Total known global gold ETF holdings fell for the fifth consecutive day through November 2, continuing to reflect weak investment demand, although gold purchases by banks have emerged as an important offsetting factor.

Gold’s movements clearly show that the geopolitical risk premium is eroding as the war in the Middle East is largely contained.

Gold is expected to be range-bound next week as $2010 has become strong resistance for the metal. Absent an escalation in the conflict, the metal could correct lower, although traders can continue to buy dollar declines from the 1970s. The next major resistance lies at $2025. Support is $1,970/$1,962/$1,945.

(The author is Associate Vice President, Fundamental Currencies and Commodities at Sharekhan by BNP Paribas)

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