Trading Strategy: Here's how to trade Gold today; key levels to watch

Gold: Rises after four straight days of losses

Performance

Spot gold after falling for four straight days rose on October 30 on bargain hunting and geopolitical uncertainty that continues to linger despite US President Trump and Chinese President Xi agreeing to a trade deal. At the time of writing this article, spot gold was changing hands at $4,007, up around 2 per cent for the day, while the MCX December gold contract at ₹121,393 was up by 0.60 per cent.

  Earlier, gold posted its first weekly loss in ten as it closed with a weekly loss of 3.29 per cent at $4,112.

US-China trade deal 

The US and China struck a trade deal in South Korea on October 29. Trump said that he would immediately halve fentanyl tariffs to 10 per cent and extend the existing truce on reciprocal tariffs, as China is set to restart soybean imports and pause rare earth licensing for a year. The US and China will suspend reciprocal shipping levies for one year.

Reduction in fentanyl-related tariffs would bring average US tariffs on China down from 40.80 per cent to 30.80 per cent, which in turn would lower average US tariffs on the world from 15.70 per cent to 14.40 per cent. The US agreed to suspend a rule that widened restrictions on blacklisted Chinese firms.

 

However, as fundamental issues like trade imbalance, industrial subsidies, etc, remain unresolved, the truce is being largely seen as a short-term respite that will give both countries time to further reduce their dependence on each other in strategic areas as they drift apart.

Central Bank watch

In a highly anticipated monetary policy decision, the US Federal Reserve slashed the overnight Fed Fund rate by 25 bps to a 3.75 per cent-4 per cent range.  The Federal Open Market Committee voted 10-2 in favour of the rate cut. The newly appointed Fed governor, Stephen Miran, dissented once again as he called for a 50-bps cut, while Jeffery Schmid, the Kansas Fed President, dissented against the rate cut, which was a hawkish surprise. The Fed said that it will end the asset runoff (reduction of its securities holdings) beginning on December 1. The Fed Chair Powell warned in his presser that the December rate cut was not a done deal as the Fed faces a lack of data due to the ongoing US government partial shutdown. Hawkish FOMC decision weighed on commodities as the US Dollar Index and yields shot up.

 

On October 29, the Central Bank of Canada cut its interest rate by 25 bps to 2.25 per cent amid tariff wars, though it signalled that its borrowing costs have reached the right level as long as its forecasts hold good.

 

In yet another key decision, as expected, on October 30, the European Central Bank left key interest rates unchanged for a third meeting as inflation is around the Bank's goal of 2 per cent and the economy continues to grow. The Euro area economy grew 0.2 per cent (forecast 0.1 per cent) on a Q-o-Q basis in Q3.

 

US Dollar and yields

The US Dollar Index, boosted by hawkish FOMC rate cut, gained nearly 0.5 per cent on October 29. At the time of writing this article, the Index was hovering around 99.55, up 0.35 per cent for the day.

 

The 2-year US yields were steady at 3.60 per cent, while ten-year yields rose 1 bp to 4.09 per cent. The US 2-year yields and 10-year yields surged by 2.90 per cent and 2 per cent respectively, on October 29 on the hawkish Fed. 

 

Gold ETFs and COMEX inventory

Total known global gold ETF holdings fell for the sixth straight day. As of October 30, gold holdings stood at 97.93 MOz, which amounts to a net outflow of 1.55 tons (48.20 tons) from the cycle peak of 98.94 MOz seen on October 21. Nonetheless, net ETF inflows are up 17.54 per cent YTD (452 tons) and holdings continue to hover around a 3-year high.

 

COMEX gold registered inventory was noted at 19.78 Moz as inventory fell for the fifteenth consecutive day.

 

Gold demand rises to record high in Q3

Per World Gold Council, Gold demand reached 1,313 tonnes (about US$146 billion) in Q3, the highest quarterly total on record, on surging investment demand driven by an uncertain and volatile geopolitical environment, US dollar weakness and investor FOMO [fear of missing out] as the price climbed higher.

 

Central banks continue to buy gold

The World Gold Council reported central banks purchased 220 tons of gold in Q3, which amounts to a 28 per cent increase over the Q2 purchases. The central banks have added 634 tons of bullion to their reserves in the first nine months of this year.

 

Iran’s gold imports soar

Iran's gold imports reached 20 tonnes ($2.1bn) in the first seven months of the Persian calendar year to October 22, which signals Tehran’s strategic inclination to safeguard liquidity and preserve financial stability.

 

Outlook

Spot gold rising despite a firmer Dollar is a positive sign for the metal.

 

Central banks continuing to buy gold at a brisk pace despite elevated gold prices underscores the importance of holding metal in the present, uncertain political, economic, and geopolitical times.

 

However, the metal is expected to be volatile in the near-term as markets digest US FOMC monetary policy decision and US-China trade deal, though the US Fed cutting rates into elevated inflation is eventually going to be positive for the metal.

 

The corrective bounce may take the metal to $4160 level. Support is seen at $3,885/$3,820.  (Disclaimer: Praveen Singh is the head of currencies and commodities at Mirae Asset Sharekhan. Views expressed are his own.)