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Gold price unable to hold gains in the face of growing optimism in U.S. manufacturing and service sector

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Editor's Note: The article was updated to reflect the drop in gold prices in delayed reaction to the data.

(Kitco News) - In delayed reaction to record positive sentiment in the service and manufacturing sector, the gold market is struggling to hold on to its daily gains and the drive to $1,800 is starting to slip.

Friday, IHS Markit said its flash U.S. manufacturing Purchasing Managers Index for April rose to a reading of 60.6, up from March's reading of 59.1. The data was relatively in line with expectations.

At the same time, the firm's service sector PMI reading rose to a reading of 63.1, up from March's reading of 60.4. Economists were forecasting the index to come in at 61.6.

The report said that sentiment in both the service sector and manufacturing sector are at session highs. "U.S. private sector businesses registered a surveyrecord expansion of output during April, as looser COVID-19 restrictions and strong client demand boosted business activity," the report said.

The gold market is starting to see some selling pressure in delayed reaction to the positive data. The gold market has been unable to hold on to its gains, with June futures last traded at $1,781.40 an ounce, roughly unchanged on the day.

According to some analysts, the gold market continues to be supported by the increasing threat of inflation. The report noted that input costs have increased at the sharpest rate since July 2008.

"Higher input prices were reportedly due to severe supplier shortages and marked rises in transportation fees," the report said. "The increase was the second-fastest on record as firms continued to partially pass-through costs to clients."

Chris Williamson, chief business economist at IHS Markit, said that heading into the second quarter, the U.S. economy is starting to fire on all cylinders.

"The upturn is broad-based: the service sector is growing at the fastest rate recorded in almost 12 years of survey history, and manufacturers reported one of the strongest expansions seen over the past seven years," he said. "The latter was all the more impressive, as factories continued to be throttled by unprecedented supply chain delays, a consequence of which was a further steep rise in prices."

However, Williamson said that despite the improving sentiment, there are still risks to the economy.

"The worsening supply situation is a concern for the outlook, especially in relation to prices. Supply needs to improve to come into line with demand. But with record supply chain delays driving a rise in backlogs of uncompleted work of a magnitude not surpassed for over seven years, firms appear to be struggling to boost operating capacity in the near-term," he said.

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