Weekly Musings – Macro Quartet for the week ending July 12, 2024

15 Jul 2024 , 08:22 AM

WHY ARE GOLD PRICES AT SUCH DIZZY HEIGHTS?

As the week concluded, the price of spot gold in the international market closed above $2,400/oz (1 troy ounce is 31.1035 grams). One can understand gold prices rising when there is geopolitical uncertainty. However, the geopolitical uncertainty in the form of Middle East, West Asia, China, and Ukraine is much lower today. Here is what is driving gold higher.

• The big trigger is still that the Fed would move much faster on rate cuts than what the Fed statement is indicating. For a change, markets feel that the CME Fedwatch may be more reliable. So, there could be 2 rate cuts by December 2024 and another 4-5 rate cuts in 2025. A fall in interest rates makes gold attractive by reducing the opportunity cost of holding gold. It is one of the strongest triggers currently for gold demand.
• Countries like China, Russia, Turkey, Middle East, and even India are buying gold aggressively to shore up their gold reserves. Clearly, in a global economy with two power centres, most countries are not comfortable betting too much on dollar as their reserve currencies. The People’s Bank of China (PBOC) has been leading the way as a gold buyer for nearly 20 months in a row. Other central banks are not too far behind. According to a JP Morgan report, the central gold buying in 2022 was more than twice the decadal average. The 2023 data is awaited, but it could only be more intense.
• One argument is that higher oil prices could stoke inflation and that could be a boost for gold prices. Gold is normally considered the best hedge against rising prices and markets do believe that the next phase of global price spikes could come from oil. In fact, once Russia also triggers supply cuts, the situation in oil market could get a lot tighter.
• There is the FOMO syndrome and nobody wants to be left behind in this gold rush. In the US, Costco is selling gold to retail consumers, seeing the big opportunity. In India, Phone Pe and Paytm have been selling gold in physical form and non-physical for quite some time and there is a lot of retail demand. The experience of the last 10 years has been that it is tough to really lose money on gold. At least, that is the big view.
• Apart from the macro triggers and the trend followers, there is another more compelling reason for gold buying. Gold has always been a traditional asset to hold during political uncertainty. This is an election year with voters in over 60 countries set to head to the polls this year, including the big US presidential elections. India just completed its election exercise this year. The uncertainty and political flux has been a key trigger for people to be buying gold.

Gold has been the rocking asset and amidst all the volatility in other asset classes, gold has maintained its secular upward move. Let us now turn to the US bond yields and dollar index.

US BOND YIELDS  SOFTEN; AS DOES THE DOLLAR INDEX

Two macro variables that set the tone for the global macros are the US bond yields and the US dollar index (DXY). Let us first look at the US 10-year bond yields.

Date	Price (%)	Open (%)	High (%)	Low (%)
Jul 08, 2024	4.280	4.290	4.317	4.265
Jul 09, 2024	4.298	4.282	4.329	4.274
Jul 10, 2024	4.282	4.296	4.312	4.267
Jul 11, 2024	4.212	4.288	4.315	4.168
Jul 12, 2024	4.187	4.209	4.253	4.174

Data Source: Bloomberg

US bond yields started the week at slightly subdued levels of 4.280%, but gradually edged lower to close at 4.187% levels towards the end of the week. Bond yields had jumped up two weeks back on expectations that there was a strong chance of Trump 2.0 in November, when the US went to elections. That spike in bond yields is over and the last two weeks saw bond yields tapering. If the Fed minutes were a key trigger for lower bond yields in the previous week, the 30 bps fall in consumer inflation in the US was the trigger in the current week. For now, the CME Fedwatch is betting heavily on two rate cuts in 2024 and 4-5 more rate cuts in 2025; something that is pushing down bond yields. Let us now turn to the US dollar index (DXY), a barometer of dollar strength.

Date	Price (%)	Open (%)	High (%)	Low (%)
Jul 08, 2024	105.00	104.88	105.03	104.80
Jul 09, 2024	105.13	104.99	105.21	104.96
Jul 10, 2024	105.05	105.12	105.17	104.98
Jul 11, 2024	104.44	104.99	105.00	104.08
Jul 12, 2024	104.09	104.52	104.55	104.04

Data Source: Bloomberg

In a week when the bond yields fell sharply post the FOMC minutes, the dollar index was not far behind. In June, we had seen dollar strength amidst weakness in the Euro and the Yen. That is done and dusted. For the week, the dollar index started on a steady note, opening at the 105.00 levels, and steadily tapered through the week, before closing the week at 104.09 levels after the June inflation announcement at 3.0%. During the week, the dollar index (DXY) scaled a high of 105.17 and a low of 104.04.

INDIA BOND YIELDS END THE WEEK ON A FLAT NOTE

The India 10-year bond yields has been oscillating above and below the 7% mark. In the latest week to July 12, 2024, the 10-year benchmark yields stayed well below the 7% mark, despite expectations of higher inflation. The consumer inflation data for June came in higher at 5.08%, but that was factored into the yields. We could see a small bounce next week.

Date	Price (%)	Open (%)	High (%)	Low (%)
Jun 17, 2024	6.984	6.980	6.991	6.975
Jun 18, 2024	6.981	6.998	6.998	6.981
Jun 19, 2024	6.974	6.981	6.981	6.964
Jun 20, 2024	6.976	6.984	6.984	6.970
Jun 21, 2024	6.973	6.984	6.984	6.972
Jun 24, 2024	6.971	6.979	6.979	6.954
Jun 25, 2024	6.983	6.972	6.989	6.969
Jun 26, 2024	6.997	6.998	7.001	6.984
Jun 27, 2024	7.000	7.006	7.009	6.987
Jun 28, 2024	7.008	6.998	7.020	6.992
Jul 01, 2024	7.013	7.023	7.024	7.010
Jul 02, 2024	7.009	7.009	7.009	7.009
Jul 02, 2024	7.001	7.009	7.009	6.999
Jul 04, 2024	6.998	6.992	7.001	6.989
Jul 05, 2024	6.993	7.016	7.016	6.987
Jul 08, 2024	6.989	6.989	6.991	6.983
Jul 09, 2024	6.989	7.006	7.006	6.983
Jul 10, 2024	6.976	6.995	6.995	6.975
Jul 11, 2024	6.982	6.982	6.982	6.982
Jul 12, 2024	6.986	6.975	6.988	6.972

Data Source: RBI

During the week, the bond yield opened at 6.989% and closed at 6.986%. The June CPI inflation in India came in higher at 5.08% on Friday evening, so we could see some residual impact in the coming week. During the week, India 10-year bond yields touched a high of 7.006% and a low of 6.972%. With the fiscal deficit and the current account deficit hinting at subdued yields, the big question mark would still be on the monsoon spread and intensity. That is, assuming that the food inflation does not get into double digits.

RUPEE UNDER PRESSURE ON OIL PRICE WORRIES

With the dollar index falling to 104 levels; the rupee was expected to strengthen, but it weakened to close around the 83.513/$ mark.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Jun 17, 2024	83.500	83.523	83.567	83.503
Jun 18, 2024	83.330	83.498	83.560	83.322
Jun 19, 2024	83.460	83.394	83.491	83.340
Jun 20, 2024	83.620	83.422	83.684	83.417
Jun 21, 2024	83.568	83.630	83.631	83.498
Jun 24, 2024	83.450	83.563	83.590	83.410
Jun 25, 2024	83.403	83.439	83.510	83.394
Jun 26, 2024	83.560	83.452	83.632	83.413
Jun 27, 2024	83.438	83.579	83.596	83.408
Jun 28, 2024	83.355	83.458	83.492	83.329
Jul 01, 2024	83.438	83.380	83.479	83.349
Jul 02, 2024	83.500	83.440	83.567	83.422
Jul 02, 2024	83.520	83.497	83.564	83.435
Jul 04, 2024	83.475	83.495	83.561	83.463
Jul 05, 2024	83.500	83.503	83.532	83.458
Jul 08, 2024	83.500	83.495	83.522	83.434
Jul 09, 2024	83.465	83.479	83.522	83.452
Jul 10, 2024	83.510	83.492	83.545	83.465
Jul 11, 2024	83.507	83.518	83.607	83.472
Jul 12, 2024	83.513	83.507	83.564	83.476

Data Source: RBI

Just about 3 weeks back, we saw the rupee weaken to a level of 83.684/$. That remains a closing low for the rupee. In the recent week, the rupee made several attempts to get close to that mark. With controlled current account deficit (CAD) and FPIs infusing $6.80 Billion in last 5 weeks, the expectation would have been for the rupee to strengthen. However, two factors are working against the rupee. Firstly, the US dollar continues to harden against the European currencies and that is putting pressure on the rupee. Secondly, oil prices stayed elevated above $85/bbl, and that is also putting pressure on the Indian rupee. For the week, the USDINR touched a high of 83.434/$ and a low of 83.607/$.

BRENT CRUDE HOLDS ABOVE $85/BBL ON ROBUST US DEMAND

After hovering below $80/bbl in the early part of June 2024, the oil prices stayed above $85 during the recent week. This week, Brent Crude held above $85/bbl. Even the WTI Crude is now trading above $81/bbl and this has been largely triggered by the sharper than expected drawdown in the US API oil inventories. Even in the latest week, the draw down was unexpectedly high at -1.9 Million barrels. The US demand for oil remains very robust.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Jun 17, 2024	83.52	82.07	83.79	81.54
Jun 18, 2024	84.53	83.62	84.70	82.97
Jun 19, 2024	84.29	84.61	84.98	84.17
Jun 20, 2024	84.86	84.40	85.14	84.19
Jun 21, 2024	84.33	84.78	85.30	83.95
Jun 24, 2024	86.01	84.99	86.16	84.71
Jun 25, 2024	85.01	86.06	86.23	84.74
Jun 26, 2024	85.25	84.89	85.81	84.47
Jun 27, 2024	86.39	85.01	86.50	84.88
Jun 28, 2024	86.41	86.56	87.22	86.24
Jul 01, 2024	86.60	84.90	86.88	84.85
Jul 02, 2024	86.24	86.71	87.46	86.16
Jul 02, 2024	87.34	86.44	87.39	85.89
Jul 04, 2024	87.43	87.09	87.59	86.51
Jul 05, 2024	86.54	87.45	87.95	86.49
Jul 08, 2024	85.75	86.74	86.92	85.56
Jul 09, 2024	84.66	85.67	85.85	84.53
Jul 10, 2024	85.08	84.92	85.66	84.00
Jul 11, 2024	85.40	85.45	85.89	84.64
Jul 12, 2024	85.03	85.69	86.35	84.95

Data Source: Bloomberg

Oil prices held above the $85/bbl mark in the week. The concerns are centred around robust US demand for oil and the Russian plan to cut supplies of oil sharply later this year. More than the OPEC meet, it was the sharp drawdown of -1.95 Million barrels of crude that triggered fears of supply struggling to meet robust US oil demand. For now, the demand supply gap is likely to continue to favour the oil producers. For the week, Brent crude touched a high of $86.92/bbl and a low of $84.00/bbl.

SPOT GOLD SPIKES TO WEEKLY CLOSE OF $2,411/OZ

The table below captures the international spot prices of gold in dollars per troy ounce (oz). A troy ounce is approximately 31.1035 grams.

Date	Price ($/oz)	Open ($/oz)	High ($/oz)	Low ($/oz)
Jun 17, 2024	2,318.87	2,332.20	2,333.48	2,310.02
Jun 18, 2024	2,328.33	2,319.38	2,333.25	2,306.63
Jun 19, 2024	2,327.48	2,329.79	2,335.10	2,323.84
Jun 20, 2024	2,359.63	2,329.15	2,365.52	2,327.30
Jun 21, 2024	2,321.51	2,360.91	2,368.77	2,316.82
Jun 24, 2024	2,332.93	2,321.60	2,335.02	2,317.37
Jun 25, 2024	2,319.01	2,333.25	2,337.26	2,315.56
Jun 26, 2024	2,297.91	2,320.00	2,323.95	2,293.70
Jun 27, 2024	2,327.45	2,299.80	2,331.00	2,296.50
Jun 28, 2024	2,325.71	2,327.75	2,339.79	2,319.15
Jul 01, 2024	2,331.70	2,326.46	2,338.72	2,318.55
Jul 02, 2024	2,329.28	2,332.05	2,336.90	2,319.24
Jul 02, 2024	2,356.06	2,328.00	2,365.06	2,326.93
Jul 04, 2024	2,356.12	2,353.70	2,362.64	2,350.76
Jul 05, 2024	2,391.46	2,358.01	2,393.04	2,354.03
Jul 08, 2024	2,358.80	2,391.77	2,391.85	2,351.16
Jul 09, 2024	2,363.58	2,358.60	2,371.52	2,349.59
Jul 10, 2024	2,371.07	2,363.80	2,386.75	2,362.73
Jul 11, 2024	2,414.78	2,371.58	2,424.62	2,370.83
Jul 12, 2024	2,411.27	2,416.47	2,418.37	2,391.52

Data Source: Bloomberg

The rally in gold prices came this week largely on the back of dollar index weakness. However, persistent central bank buying and retail demand is also boost gold demand. Gold closed the previous week at $2,391/oz, but closed sharply higher at $2,411/oz this week. Gold traders are also betting on rates cuts being more aggressive in 2025, which will help reduce the opportunity cost of holding gold. Gold may also catch up with the silver rally to respect the gold/silver ratio relationship. During the week, gold touched a high of $2,425/oz and a low of $2,350/oz.