Gold outlook: Analyst suggests trading strategy ahead of Dhanteras

Performance:

• On October 16, spot gold traded between $4,199 and $4,298.73 (a fresh record high) as the metal approached the critical resistance at $4,300. Spot gold rallied for the fifth straight day on safe haven demand as US-China trade tensions have come to fore and investors’ demand coming through exchange traded funds (ETFs) remains quite robust.
• The yellow metal has surged 30 per cent since its August 1 low of $3,281 and is up 63 per cent year-to-date (Y-T-D).
• At the time of writing this report, spot gold was trading at $4,285, up 1.88 per cent for the day.
• The shiny metal has rallied for eight straight weeks.

Data roundup:

• Philadelphia Fed Business Outlook (October) slumped to -12.80 in October, a six-month low, from 23.20 in September and trailed the estimate of 10.
• New York Fed Business Services Index deteriorated to -23.6 in October from -19.4 in September.
• The National Association of Home Builders/Wells Fargo Housing Market index increased five points to 37 this month, a six-month high.

Two regional US banks in trouble:

• Shares of a pair of regional US banks tumbled as they disclosed problems with loans involving allegations of fraud.
• Zions Bancorp slumped after it disclosed a $50 million charge-off for a loan underwritten by its wholly owned subsidiary, California Bank & Trust, in San Diego.
• Western Alliance Bancorp said it is dealing with a borrower that failed to provide collateral loans in the first position.

ETFs:

Total known global gold ETF holdings surged to a new cycle high of 97.76MOz, now, less than 2 per cent below the all-time high level of recorded in October 2020. Gold ETF holdings, having risen for six straight weeks, are up 18 per cent Y-T-D. 

Geopolitics watch:

US President Donald Trump said he would meet Russian President Putin in Hungary to seek an end to the Ukraine war. The date is yet to be decided though. The said meeting will take place a day before Trump's White House meeting with Ukrainian leader Zelenskiy. 

US-China trade tension has flared once again following China's recent decision to unveil unprecedented controls on the rare-earth supply chain.US Treasury Secretary Bessent said that there is a possibility of extending a pause of import duties on Chinese goods for longer than three months if China loosens its controls on rare earths. It is to be noted that tariff truce between these two nations is set to end on November 10.  Meanwhile, Bessent also floated the idea of a coordinated response to China's export controls. The International Monetary Fund (IMF) called China's export restrictions harmful to a fragile world economy. China, in turn, has blamed the US for recent escalations in trade tensions. In September, after Madrid talks between the two countries, the US Commerce Department came out with a rule that widened the application of sanctions to companies affiliated with blacklisted Chinese companies. As per the rule, subsidiaries that are at least 50 per cent owned by blacklisted companies will face the same curbs as their sanctioned parents with increased focus on due diligence requirements for shipments to entities with significant minority ownership. 

Upcoming data:

• Major US data on cards include housing starts (October 17), import and export price Indices (October 17), TIC flows (October 18), Leading Index (October 20), existing home sales (October 23). However, there is a possibility that at least some of this data may get delayed due to ongoing government shutdown.

Central banks’ gold buying:

• Central banks added a net 19 tons of gold in August as Poland, emerging as the most active buyer, has added more than 60 tons to its reserves.

Fedspeak:

• Fed Governor Miran said that economic uncertainty is back due to US-China trade tensions. He called for a 50-bps rate cut, though expects only a 25-bps cut.
• Fed Governor Waller said that based on current conditions, a 25-bps rate cut should happen, though rate cuts beyond October will depend on data. He added that If the job market continues to weaken, the Fed should cut towards a neutral rate, which is about 100-125 bps below current rate.

European developments:

• French Prime Minister Sébastien Lecornu survived his first no-confidence vote in the wake of suspension of the controversial pension reform until at least after the 2027 presidential elections.
• United Kingdom Chancellor of the Exchequer Rachel Reeves said that she is determined to bring inflation back to the target. She denied introducing the wealth tax into the upcoming Autumn Budget in November.

Outlook:

• Gold is currently quite overbought, but fundamentals remain quite bullish.
• The US Dollar, which is down by around 0.40 per cent to 98.39, is likely to remain under pressure due to US banks’ woes as 10-year yields break below 4 per cent.
• US-China trade tensions, robust ETF inflows, currency debasements, weaker US stock market and geopolitical concerns continue to act as strong tailwinds for the metal.
• As gold is in an unchartered territory, it is difficult to forecast prices; however, a breach of $4,300 level will open a way to $4,500 (MCX December contract ₹1,36,000) a – a psychological resistance. Support is at $4,200 (₹1,27,000)/$4,150 (₹1.25,000).
• Both buyers and sellers need to put a risk mechanism in place to safeguard their positions as gold is likely to be highly volatile.

(Disclaimer: This article is by  Praveen Singh, head currencies and commodities at Mirae Asset Sharekhan. Views expressed are his own.)