Gold: Crude, inflation key threats; analyst sees $4400 as tactical buy zone

Mirae Asset ShareKhan's Praveen Singh said that gold's key support levels are at $4,450, $4,358, and $4,300-4,330, while resistance is seen at $4,533, $4,575, and $4,650.

Disclaimer: This article is written by Praveen Singh, head of commodities at Mirae Asset ShareKhan. Views expressed are his own. Readers' discretion is advised.

 

Dovish Fed rhetoric eases downside risks

 

Gold, which had looked vulnerable after the Fed Chair Warsh-led sell-off following his Jackson Hole speech on August 28 pushed prices below $4,300 on September 2, received a strong boost from comments by two key Fed officials indicating that inflation continues to moderate and that rates can remain unchanged if the trend persists. In other words, further progress in August CPI data would give the Fed room to stay patient rather than rushing to raise rates. As a result, gold rebounded nearly 5 per cent from Wednesday's low of $4,282.

 

 

At the time of writing on the evening of September 3, the yellow metal was trading 2.2 per cent higher on the day at around $4,490.

 

Fedspeak:

 

On September 3, the New York Fed President John Williams said that there is evidence inflation continues to trend down as the impact of tariffs fades. Identifying tariffs and energy as the two biggest sources of inflation, he added that the neutral rate is around 1 per cent and the impact of energy prices is not spreading to other areas of the economy. He cited investment in AI and growth expectations as the reasons behind hardening bond yields. He suggested that a 'wait-and-see' approach is appropriate as inflation expectations remain anchored.

 

Gold got a further boost on September 3 as Fed Governor Waller said that his decision on rates will be heavily influenced by the upcoming CPI inflation data on September 9, and he is willing to hold rates steady should inflation show a downtrend. He added that price pressures were showing signs of easing.

 

Hammack and Goolsbee will go on air on September 4, after which the Federal Reserve's two-week external communication blackout period will begin in the wake of the September 15-16 FOMC meeting.

 

Federal Reserve rate hike probability:

 

Probability of the Fed hiking rate at its September 16 meeting has declined to a coin toss (50 per cent) from 65 per cent seen a couple of days ago as traders, taking heart in comforting speeches of Fed officials Williams and Waller, pared their rate hike bets.  

 

Geopolitics and oil:

 

Crude oil prices rallied for the fourth straight day on Thursday as Iran targeted US bases in Kuwait and the UAE in reaction to US strikes on Wednesday.

 

Dated Brent oil is approaching $100 on escalating tensions between Iran and the US as the two countries resumed exchanging strikes after a month.

 

Israeli defence minister Katz warned that Israel will send Iran to stone age if attacked. He floated a possibility of Iran attacking Israel on upcoming Jewish holidays.

 

Israel's PM Netanyahu said that Israel controls 60 per cent of Gaza and they are not retreating.

 

ETF holdings and COMEX inventory:

 

Gold ETFs have been receiving strong inflows supporting gold prices. Holdings, currently at 99.15 MOz, are up 0.20 Moz YTD (6.22 tons) as they bottomed out at 96.16 Moz on July 20.

 

Net holdings have surged 3.01 per cent (~93 tons) since then. However, they remain ~55 tons below the cycle peak of 100.92 Moz seen just before the start of the Iran war on February 28.

 

Registered COMEX gold inventory stands at 15.10 Moz, up ~28.30 tons from the cycle low of 14.19 Moz noted on August 7.

 

Dutch Central Bank moves gold bars out of the US and Canada:

 

The Dutch Central Bank (DNB) has relocated 86 tons of gold from New York and Ottawa, citing rising geopolitical risks and the need to strengthen 'crisis preparedness'. The bank has transferred gold to the Bank of England as it feels in crisis, shiny metal can be mobilized directly and faster in London than in the US and Canada.

 

Data roundup:

 

US data released Thursday were largely encouraging. ISM services rose from 54.1 in July to 55.40 in August - quickest since February. Prices Paid Index at 72.6 increased at a faster pace than the expected 70 (prior 70.3). New orders rose more than expected, though the employment index contracted more than estimated. Weekly job data were mixed. Trade deficit surged from $71.20 billion in June to $90.20 billion in July (forecast -$90.2 billion).

 

China's RatingDog services data (August) came in at 51.40, Vs the estimate of 50.60 (prior 50.40), which helped the composite RatingDog PMI data rise to 52.10 (forecast 50.60) in August from 50.40 in July. However, government PMIs have been disappointing. UK composite PMI in August matched the estimate of 52.5, while the Eurozone's composite PMI came in at 52, Vs the estimate and prior data of 52.10.

 

Dollar Index and yields:

 

The US Dollar Index was hit severely due to dovish Fedspeak and a sharp rally in the Yen that came on increased probability that the Bank of Japan will hike rates soon.

 

On September 3, the Yen surged 2 per cent against the US Dollar to the highest in a month as a Bank of Japan official cited a possibility of back-to-back/outsized hikes. A possibility of intervention by Japan's finance ministry also supported the Japanese currency.

 

The Index at the time of writing this article was hovering around 98.98, down around 0.60 per cent for the day as it slid nearly 0.90 per cent in the last two days.

 

Yields eased on traders paring back their rate hike bets. Two-year yields at 4.32 per cent were down 0.90 per cent for the day as yields retreated sharply from the 20-month and fresh cycle high of 4.4 per cent reached on September 2. Similarly, ten-year yields softened by 0.75 per cent to 4.75 per cent.

 

Central Banks continue to buy gold:

 

Latest data from the World Gold Council shows that central banks continued to buy gold into the dips, albeit at a slower pace. They added 23 tons of gold to their forex reserves in July, which reflects a slowdown in their buying momentum as compared to their pace of buying in the previous two months, though the three-month rolling average rose to the highest this year.

 

Upcoming events:

 

The ECB will deliver its monetary policy on September 10. It is widely expected that the Central Bank will hike the benchmark rate by 25 bps, its second interest rate hike in this cycle. ECB's one-week pre-rate decision quiet period began on September 3.

 

Upcoming data:

 

Major US data on deck in the near term include nonfarm payrolls (September 4), NY Fed August one-year inflation expectations (September 8), August PPI (September 10) and August CPI (September 11).

 

Traders will also monitor China's trade balance (September 8) and inflation data (September 9).

 

Gold price outlook:

 

Recent dovish Fed communication has lowered the significance of nonfarm payrolls report, with markets increasingly focused on upcoming CPI inflation data ahead of the Fed's September 11 meeting. Consequently, gold may prove resilient to a moderate payroll beat and would likely require a substantially stronger-than-expected employment print to trigger a meaningful correction.

 

The main threat to gold remains a sharp rise in crude oil prices, which could strengthen inflation expectations and temper expectations of policy easing.

 

In the absence of a strong payrolls surprise and a sustained oil rally, gold is likely to trade sideways. Pullbacks toward $4,400 may present tactical buying opportunities with tight stop loss for 2-4 per cent gains in short term.

 

Key support levels are at $4,450, $4,358, and $4,300-4,330, while resistance is seen at $4,533, $4,575, and $4,650.