Gold outlook: Weak Dollar, geopolitical risks to fuel further gains

Gold – Up on safe haven demand and a weaker Dollar

Gold performance:

On May 20, buoyed by a weaker Dollar, elevated economic risks in the wake of Moody’s downgrading US credit rating and heightened geopolitical risks, spot gold breached the resistance zone of $3250-$3257.

 

At the time of writing, the metal was trading at $3,285, up by nearly 2 per cent on the day and highest since May 12. The MCX June contract was changing hands at ₹94,895, up around 1.71 per cent on a daily basis. 

 

Risk appetite was slightly impaired as market participants wait for further clarity on the tariff front while the Trump administration struggles to convince Republican holdouts in Congress on the tax cut bill.

 

 

The bill, which would extend the 2017 tax cuts and would also add tax breaks on income from tips and overtime pay, could add $3 trillion to $5 trillion to the federal government's $36 trillion debt.  

Geopolitical watch: 

Iran, in its response to US President Trump's special envoy's demand that the Islamic Republic cease its production of the fissile material, said that its uranium enrichment ability is 'non-negotiable’. The Islamic Republic called it a 'vital technology' for its nuclear industry. Iran and the US, engaged in indirect negotiations, are likely to hold their next round of talks this week in Europe.

 

Israel's PM Netanyahu said that Israel will take over the entire Gaza Strip, and the military will carry out an unprecedented attack on Hamas. Israel's decision to step up its operations has made many Arab and European nations concerned over the possibility of huge death tolls in Gaza.

 

Trump's two-hour talks with Putin on the Ukraine-Russia ceasefire did not yield much. Trump did not mention any demand for a timeline. European leaders are concerned that Trump is retreating from his position of demanding a ceasefire. 

Complacency in markets: 

JP Morgan’s chief, Jamie Dimon, in a speech on Monday, warned that given heightened geopolitical stagflation and geopolitical risks, there is an extraordinary amount of complacency in the marketplace.

 

Japan warns of a fiscal crisis ‘worse than Greece’ as its borrowing costs surge:

 

On May 19, Japan’s PM Ishiba, a fiscal hawk, warned the members of Parliament that any tax cuts can’t be paid for by more borrowings as the nation is facing a fiscal crisis worse than Greece, with its borrowing costs hitting a 20-year high. Japan’s debt-to-GDP ratio is more than 250 per cent.

China's gold imports surge:

China imported 127.50 tons of gold in April, a 11-month high, despite record prices as the Chinese Central Bank eased restrictions on imports. PBoC allocated fresh quotas to some commercial banks in April as the Bank responded to strong demand from institutional and retail investors. 

ECB cites gold market as a risk to financial stability:

On May 19, the European Central Bank economists expressed concerns that gold could be a source of danger to the Eurozone's financial stability in times of geopolitical stress due to demand for physical settlements, dominance of large firms and opaque transactions as margin calls and unwinding of leveraged positions could lead to liquidity stress rippling across the wider financial system. 

Global gold ETF holdings:

Total known global gold ETF holdings fell for the third straight day to 87.926 MOz as of May 19, which is the lowest level since April 8. ETF holdings have fallen for four straight weeks as investors continued to book profits after rallying to a record high of $3,500.

US Dollar Index and yields:

At the time of writing, notwithstanding higher yields, the US Dollar Index was trading at 100.111, down nearly 0.30 per cent on the day.

 

Ten-year US yields, after backing off from 4.56 per cent -- post Moody's downgrade high -- were hovering around 4.48 per cent, up around 0.6 per cent on the day. Similarly, 5-year yields that have earlier jumped past the April high of 5.0186 per cent to 5.035 per cent, the highest since November 2023, have backed off, but at 4.96 per cent, were up by nearly 1 per cent on the day.

CFTC position:

Money managers reduced their net bullish gold bets by 1,433 net-long positions to 110,874, to a 14-month low last week.

Outlook:

Gold is well supported in a risk-off scenario due to geopolitical and economic issues. In addition, weakness in the US Dollar and weakening gold-yield relationship are acting as a tailwind for the metal.

 

Spot gold faces resistance at $3292 (MCX Gold June ₹95,000), followed by $3330 (₹96,200). The metal may rise to $3370 (₹97,300) if tariff/economic/geopolitical issues become even more concerning. Support is at $3250 (₹93,800)/$3200(₹92,400).

 

(Disclaimer: Praveen Singh is associate vice president of fundamental currencies and commodities at Mirae Asset Sharekhan. Views expressed are his own.)