Gold may rally to $3,400 on tariff fears; deadline extensions to cap upside

Business Standard

5 hours ago

Gold: Caught between trade war and encouraging US data
Gold performance:
On July 3, traders, anticipating a weak US nonfarm payroll report, as the ADP employment report, released a day earlier, had for the first time since 2023 shown a decline in number of jobs, pushed spot gold to $3365 -- highest since June 24 -- amid subdued US Dollar and US yields. However, the yellow metal tumbled on a surprisingly encouraging US job report.
The metal traded between $3,310 and $3,365 during the day.
At the time of writing this article, the metal was changing hands at $3329, down 0.9 per cent on the day.
The MCX August contract at ₹96,778 was down nearly 0.6 per cent.
Data roundup:
US nonfarm payroll (June) was largely reassuring as US employers added 1,47,000 jobs versus the expectation of 1,06,000 jobs, which belied the fears of job losses as portrayed by the ADP report released on Wednesday. Two-month payroll net revision stood at 16,000 as the unemployment rate unexpectedly slid from 4.2 per cent to 4.1 per cent versus the estimate of 4.3 per cent.
However, the decline in the unemployment rate has been driven by job seekers, especially foreigners, leaving the workforce pool due to deportation, lack of job opportunities, etc. Labour force participation rate edged lower from 62.4 per cent to 62.3 per cent (forecast 62.4 per cent). Average hourly earnings rose 0.2 per cent m-o-m and 3.7 per cent versus the respective forecast of 0.3 per cent and 3.80 per cent. ISM Services Index crept back into an expansion territory after a month as the largest component of the US economy posted a reading of 50.80; thus, beating the estimate of 50.60 as new orders expanded, though services employment contracted more than expected.
Tariff developments:
US Treasury Secretary Bessent said on July 3 that President Trump will decide whether to extend the July 9 tariff hike deadline.
Earlier on July 2, the US and Vietnam finalised a trade deal in principle under which Vietnam will pay 20 per cent tariffs on its US exports, whereas the US will pay 0 per cent tariffs on its exports to Vietnam. In addition, the US imposed a 40 per cent tariff rate on Vietnam's transhipments, which is likely to make Chinese goods exported through Vietnam to the US costlier. It is to be noted that a significant share of
Vietnam's exports to the US include goods like AirPods, phones, etc, assembled with Chinese parts in Vietnam's factories. As per the Lowly Institute (Sydney), 28 per cent of Vietnamese exports to the US were made up of Chinese components in 2022. Chinese exports to Southeast Asia have surged this year.
China is assessing the US-Vietnam deal and has warned against clauses harming its business interests.
China is speeding up the approval rate earth exports to European companies.
Trump scores a major economic policy victory:
The US House passed Trump's $3.4 trillion tax cut and spending bill, which is positive for the metal on deficit concerns.
Dollar Index and yields:
The US Dollar Index fell to a fresh cycle low of 96.377, the lowest since February 2022, on July 1, on Fed rate cut notions. The Index, at the time of writing, was hovering around 97.14, up nearly 0.5 per cent on the day as US data boosted the Greenback.
US 10-year yields, which slumped to 4.18 per cent on July 1, the lowest since May, rose for the third straight day and were noted at 4.35 per cent, up nearly 2 per cent on the day, as July rate cut hopes faded on stronger than expected US job and ISM services report.
ETF:
Total known global gold ETF holdings rose to 90.506 MOz on July 2 as holdings remain at nearly 2 high and are up 9.24 per cent YTD.
COMEX gold inventory:
COMEX gold inventory at 37.048 Moz is down around 17 per cent from the record high of 45.072 Moz in April.
UBS survey on gold:
As per a UBS Group AG Survey of nearly 40 central banks, the share of central bank reserve managers who see the geopolitical weaponisation of FX Reserves as an investment risk has increased from 32 per cent in 2024 to 49 per cent in 2025.
Nearly 52 per cent of central banks intend to add gold over the next year.
Upcoming data:
The US data calendar is quite light next week; the major attraction will be the FOMC minutes of the June 18 FOMC meeting, which will be released on July 9.
China's PPI and CPI data (June) will be released on July 9.
Gold outlook:
Key US data released this week has allayed fears concerning the nation's economic health to some extent, as the monthly job report and PMIs turned out to be reasonably strong, which has reduced the July Fed rate cut possibility to zero. Rebound in the US Dollar Index and yields will exert downside pressure on the metal, which would be boosted further due to healthy risk appetite as US stock Indices are at record highs. However, traders will closely monitor trade deal developments as the July 9 deadline approaches. Friction arising between the US and its key trading partners during deal negotiations will support the metal. China has already expressed its concerns over the US-Vietnam trade deal. Thus, gold is caught between the impact of strong US data and the possibility of trade friction as trade negotiations continue.
In such a scenario, gold is likely to trade between $3292 (₹95,700) and $3370 (₹98,000). The next major resistance is at $3400 (₹98,800). Next support is at $3247 (Rs 94,400)/$3228 (Rs 93,800).
Trump extending the July 9 deadline will be heavy on the yellow metal. In that case, a decline to $3200 (Rs 93,000) is possible. The preferred strategy is to sell with a stop loss above $3370.