As we step into the first week of January, the gold market exhibits a rather restrained demeanorOn Monday, January 6, gold trades in a narrow range around $2640.18 per ounce, aligning closely with the middle band of the Bollinger BandsThe previous week witnessed gold prices retreating from a three-week high, ending at $2639.62 per ounce—a decrease of approximately 0.69%. This downward shift comes amid stronger-than-expected U.SISM manufacturing PMI data released for JanuaryThe surge in bond yields exerted downward pressure on gold prices, pushing the market to brace itself for the anticipated economic and trade shifts in the U.S.

Nitesh Shah, a strategist at WisdomTree, noted that the new president’s support for a tariff-increasing agenda has strengthened the dollar, imposing considerable potential stress on the metals market

Indeed, the dollar index climbed by 0.82% last week, marking the strongest weekly performance since mid-November and maintaining its uptrend for five consecutive weeks, rendering gold pricier for overseas buyersDespite a slight dip of 0.3% on Friday, the dollar index closed around 108.91. It reached a peak of 109.54 on Thursday—its highest since November 10, 2022.

Such strength in the dollar could hinder the Federal Reserve's rate-cutting pace, effectively capping gold’s upward potentialFollowing three anticipated rate cuts by the Fed in 2024, inflationary pressures suggest only two cuts may occur in 2025. In December, the U.S

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manufacturing sector showed signs of nearing recovery, with production rebounding and new orders on the rise; however, ambiguity clouds the outlook due to potential tariff hikes that could elevate the prices of imported raw materials.

Although the PMI rose to a nine-month high of 49.3—up from 48.4 in November—this number still indicates a contraction in manufacturing, which accounts for 10.3% of the economyEconomists had earlier predicted it would remain unchangedWith the PMI below 50 for nine consecutive months, similar indices showcased an exaggerated decline in factory outputGovernment data from the previous month indicated that the annualized growth rate for the manufacturing sector in Q3 was 3.2%, accounting for a portion of the economy's 3.1% growth in the same period.

Home to proposed tax cuts which may uplift the manufacturing sector, the U.S

also faces potential price surges on raw materials due to tariffs imposed on importsThe forward-looking new orders index from the ISM report climbed from 50.4 in November to 52.5. This was the first expansion indication for new orders since March last yearThe manufacturing prices-paid index also rose from 50.3 to 52.5, further reflecting inflationary pressures.

Jeffrey Roach, LPL Financial's chief economist, suggested that businesses may be preemptively increasing demand due to uncertainties in the future trade environmentHe added that the rise in input prices is an indication of persistent inflationary pressureReflecting apprehensions regarding tariff increases, ISM imports index rose from 47.6 to 49.7, demonstrating market concerns over potential tariff hikes.

Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee attributed the rise in import and inventory indices to early deliveries of materials to sidestep potential tariffs, and businesses acting proactively to mitigate the consequences of any future tariffs.

Conversely, employment in factories has contracted further, with the manufacturing employment index dropping from 48.1 to 45.3. This metric does not serve as a reliable forecast of manufacturing jobs, as seen in the closely scrutinized government employment reports.

Two Federal Reserve decision-makers emphasized last week that their work to control inflation is far from over, although they are wary of risking harm to the labor market in the process

Fed Board Governorg and San Francisco Fed President Mary Daly highlighted the fine balancing act the Fed must navigate this year, following a one-percentage-point cut to short-term interest rates last yearThey stressed the importance of maintaining current unemployment levels instead of allowing it to spike dramatically.

While inflation downtrend risks seem controlled, Richmond Fed President Barkin stated the Fed's benchmark policy rate should remain restrictive until inflation reliably returns to the targeted 2%. He indicated that upside inflation risks are more significant than downside pressures due to persistent economic strength, wage, and price pressures

His remarks reflect the ongoing internal discussions within the Fed regarding the timing of further rate cuts and economic conditions as the new administration prepares to assume power later this month.

Even with the recent strength of the dollar, uncertainty looms regarding when the new administration will unveil its policies and their potential impactThis uncertainty may temporarily pause the dollar's bullish streak while simultaneously increasing the demand for gold as a safe haven.

Helen Given, a trader at Monex USA, indicated that with the new government in place, a potential dollar retreat might occur due to proposed tariffs—which require time for implementation, and their actual enforcement remains uncertain

Yet, moving into the latter half of the year, she anticipates further strengthening of the dollar.

Last week, U.STreasury yields held steady near their recent peaks following positive manufacturing news, though their movements were limited amid holiday trading before pivotal employment data and significant debt issuanceThe market is particularly focused on upcoming labor market data releases, with the December employment report being the highlight of the week.

In the tranquility of the market, devoid of major influential factors, traders may shift attention towards liquidity, whether driven by arbitrage or portfolio adjustments

Given the low unemployment and persistent inflation, the Fed is expected to maintain its current policy stance without easing, with futures traders estimating a near 90% probability that the Fed will remain stationary this month, and a 50% chance of a first rate cut coming in March.

The Treasury will auction $119 billion in securities this week, underscoring the budgetary challenges facing the governmentOn tap are auctions of $58 billion in three-year bonds on Tuesday, $39 billion in ten-year bonds on Wednesday, and $22 billion in thirty-year bonds on ThursdayMonitoring the ten-year bond remains crucial, as current interest rates are higher than during the onset of this easing cycle, suggesting potential market concerns surrounding the Fed's approach to inflation

However, stabilization in these rates has been observed of late.

As the market moves forward, the seasonal demand for gold remains a supporting factorHistorical data indicates that January typically sees a rise in gold prices; in fact, over the past decade, seven Januarys recorded increases, with an average price surge of $38.82—marking the most significant monthly growth.

In the coming trading day, attention will also be fixed on the U.S