Gold in backwardation, eyes weekly gains on less hawkish Fed

© Reuters.

By Ambar Warrick 

Investing.com--Gold prices entered backwardation on Friday and were headed for mild gains this week as optimism over the prospect of smaller interest rate hikes by the U.S. Federal Reserve offset worsening economic indicators. 

Spot gold prices traded at higher levels than futures- a phenomenon known as backwardation - which indicates that near-term demand for the yellow metal may be increasing.

Spot gold fell 0.1% to $1,753.20 an ounce, while gold futures expiring in December fell 0.1% to $1,752.75 an ounce by 19:40 ET (00:40 GMT). Both instruments were set to add about 0.3% this week. 

But futures contracts beyond December traded higher than spot prices. Futures expiring in January traded around $1,761.6 an ounce, while the February contract traded around $1,768.8 an ounce. 

A U.S. holiday on Thursday gave metal markets few cues to trade on, with volumes also remaining muted. But positive cues from the minutes of the Fed’s November meeting, released earlier this week, provided a tailwind for prices.

The minutes showed that several members of the central bank found it appropriate to slow its pace of interest rate hikes, in order to gauge the economic impact of a sharp rise in rates this year. This indicates relatively lesser pressure on metal markets in the near term. 

But U.S. interest rates are still at levels last seen during the 2008 financial crisis, and are expected to peak at much higher levels. 

Still, gold may benefit from renewed safe haven demand in the coming months, especially as the dollar retreats further, and as global economic conditions worsen. PMI prints from Japan and the U.S. released this week painted a dour picture of the world’s largest economies, as did record-high daily COVID-19 infections in China. 

The dollar was set to lose 1% this week, as dovish signals from the Fed spurred bets that U.S. inflation and the Fed’s pace of rate hikes had peaked this year. A falling greenback helped support broader metal markets.

Silver futures rose 0.3% on Friday and were set to add 2% this week, while platinum futures fell 0.2%, but were set to add 1% this week.

Among industrial metals, copper prices rose marginally on Friday, but were set to end the week largely flat on negative signals from major importer China. 

Copper futures rose 0.2% to $3.6360 a pound, and were set to end the week 0.1% higher. 

China reintroduced movement restrictions in several major cities this week, as the country grapples with its worst COVID-19 outbreak yet amid record-high daily infections.

COVID-related disruptions ground Chinese economic growth to a halt this year, severely denting metal demand in the world’s largest copper importer. 

With growth now set to weaken further from the new outbreak, the outlook for copper appears dire despite signs of tightening supply.