Gold continues its decline

Gold continues its decline with the strength of the US economy versus the continued weakness of the eurozone

Today’s market analysis on behalf of Samer Hasn Market Analyst and part of the Research Team at XS.com

Gold continues to decline today by more than 1% and reaches again the level of $2,362 per ounce in spot prices, while COMEX futures contracts decline by a greater percentage, after the noticeable gains recorded yesterday.

Gold’s gains come as the US economy beat expectations with the Q2 GDP reading for the second quarter, in exchange for the continued flow of weaker-than-expected data from the eurozone and its major economies in particular. This also comes amid continued high geopolitical concerns in the Middle East in light of Netanyahu’s speech before Congress yesterday.

Today’s figures slightly dampen the odds of a rate cut in September, but they are still very high and so is for a possible second cut in November or December. Therefore, gold’s declines may be temporary if expectations of interest rate cuts do not change significantly.

According to the CME FedWatch Tool, the probability that the Fed will cut interest rates by 25 basis points is approximately 85% in September. While the probability that we will see another cut in November or December of the same amount is 60% and 34%, respectively.

As for the eurozone, the Ifo Business Climate Index recorded a weaker than expected reading for July, which is the lowest since last March. While sentiment has continued to decline –pessimism has increased – in each of the manufacturing, services, trade and construction sectors, with the future expectation declining, according to the Ifo survey.

This survey also came after the better-than-expected reading of the GfK Consumer Climate Index for the same period, which we witnessed yesterday. It is believed that this recovery in sentiment may be due to the momentum created by the European Football Championship held in Germany, and that the sustainability of this recovery is questionable.

Add to that a series of PMI numbers that are mostly worse than expected for the region, Germany, and France, due to pressure on the manufacturing sector, which is witnessing difficult conditions for demand.

This disparity in economic performance between the US and the eurozone – which still seems far from restoring growth – would preserve the dollar’s strength against the major currencies and keep the bond yield gap high in favor of treasury bonds, which in turn puts pressure on gold.

Gold’s losses today came despite the decline in Treasury yields, which appear to be tending to rest the gains recorded over the past days by exploiting the weak performance of the stock market, which is affected by the season of mixed quarterly earnings results.

While I believe that the continued flow of weak earnings for major companies, which may suggest a decline in economic activity, would slow or stop the upward momentum of the stock market, and this in turn may restore the luster of safe havens, the first of which is gold.

Aside from the economy, the most important pillars of gold maintaining its gains, represented by geopolitical uncertainty, especially in the Middle East, are still present and may preserve gold’s meaning despite the recent declines.

Benjamin Netanyahu’s speech before Congress yesterday was not a step towards reaching a ceasefire in Gaza. Instead, he reiterated his determination to achieve total victory over Hamas, meaning he intends to continue the war, despite doubts about its feasibility from military leaders and US administration officials. He also denounced allegations of genocide against him and cursed the demonstrators opposing him outside the Capitol. In his speech, which was warmly received by the Republicans, he only mentioned the ceasefire negotiations briefly. According to criticism from a pro-Israel group quoted by The New York Times, the speech did not address the post-war plan or achieving peace in the region. Additionally, Reuters reported that Hamas believes Netanyahu’s speech indicates he does not want to reach a truce agreement.

This prolonged war in Gaza keeps fears in mind about the expansion of the war to include several fronts in the region and even outside it, and this in turn maintains the attractiveness of gold.

Zaid Barem / YMM