US economic data could drive gold even higher

Gold futures are up almost 8% on the month and are flirting with the $2,000 an ounce mark ahead of the US core PCE data due to be released Friday afternoon.

Over the last few weeks the ripple effects from the SVB and Credit Suisse crises on the rest of the banking sector and the weakness in the dollar have worked in favour of both gold and silver (up 13% on the month for the latter). If banking stocks remain as settled as they seem for the time being (although it may be too early to bank on that), gold’s next move will hinge on the Federal Reserve’s interest rates plans.

US inflation data is still significantly above where the Fed would like it to be, and the markets are pricing at least one more rate hike in the immediate future, albeit a small one. The expected subsequent weakness in the dollar and bond markets will continue to make gold an attractive asset.

Focus on PCE data Friday

Eyes are now peeled on the Personal Consumption Expenditure Price Index, the Federal Reserve’s preferred measure of inflation, due to be released Friday afternoon.

The index is expected to have risen 0.4% on the month in February, and 4.7% on last year, which is more than twice the Fed’s inflation target. This will put the US central bank in a difficult position where it will have to balance the need to get a grip over domestic inflation with wanting to provide steadiness to the already shaken banking sector.

For the moment gold is sitting still at $1,997.7/oz as traders bide their time ahead of the data release but PCE data could potentially open the floodgate to a breach of the $2,000/oz level which, in turn, is likely to trigger a further buying spurt to as high as $2,010/oz. If that fails, prices could turn south but are unlikely to go below the current resistance level of $1,960/oz.

Fund positions

Given the uncertainty with banking stocks it is not surprising that large speculative investors kept increasing their net long positions in gold throughout March, bringing them to a seven week high last week.

During the same period managed funds cut their short exposure and increased their long exposure. Managed funds have not yet swung into an extreme positive position, which means there could be further increases in their long positions over the coming weeks.

Silver, the better option?

Silver has had an even better month than gold, rising 13% in March to trade above $24/oz. As the banking stocks have settled, previously risk-averse investors have turned back to this precious metal, particularly as data started indicating that Chinese demand for silver is picking up.

China is the biggest buyer of silver jewellery and with the rigid lockdowns of the last year increasingly in the rear-mirror view retail buying is trending towards pre-Covid levels.

Chinese manufacturing data also shows that the country’s manufacturing sector is swinging back to growth, which is equally supportive for silver as the metal is used in industries such as solar panels, kitchenware and medical equipment.

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