Short-term traders can look to buy gold for upside till $4200: Mirae Asset

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

 

Buoyed by a slumping US dollar, lower yields and a mild retreat in oil prices, gold extended its winning streak to the second straight day on July 30. On Thursday night, the yellow metal was trading nearly 0.9% higher for the day at $4,103.

 

Geopolitics and oil

Five days of relative calm in the US-Iran conflict have been shattered as Iran-backed allies in Iraq fired drones on Saudi Arabia. US and Saudi Arabia conducted joint strikes targeting Iraqi militia.

 

 

The US launched a massive wave of attacks against IRGC command centres and drone facilities. Iran has warned Cyprus and Bulgaria to refrain from assisting the US in its military attacks. A drone strike on a US-owned gas tanker in Egypt’s Mediterranean port of Damietta has raised concerns over supplies through Suez Canal as reach of Iran’s drone warfare has turned the situation quite volatile.

 

Iran's Islamic Revolutionary Guard Corps (IRGC) claimed that it destroyed two drone hangars, an aircraft fuel tank and military helicopters at the US-operated Ali Al Salem Air Base in Kuwait. IRGC also claimed to have attacked the US Al-Azraq Air Base in Jordan with ballistic missiles on Thursday morning.

 

Reuters reported that Houthis worked with Iraqi armed groups to attack Saudi Arabia from Iraqi territory this week. Admiral Brad Cooper, US commander of CENTCOM, is drawing up plans for 10 to 14 days of heavy bombing to cripple its missile capability.

 

China is sending 400 shoulder-fired air-defence missile launchers to Iran under a new deal underscoring their increasing military ties. The move could threaten the relationship between the US and China.

 

Crude oil prices retreated slightly on Thursday on signs of increased flows through the Strait of Hormuz despite the intensifying conflict.

 

Central Bank Watch

As widely expected, the US Federal Reserve, in its monetary policy concluded on July 29, kept the overnight Fed Fund Rate unchanged at 3.5-3.75% in 9-3 voting. Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan dissented in favour of a 25 basis-point hike; however, markets had been expecting these officials to dissent, so it was not a surprise. Although the Fed Chair Warsh reiterated his hawkish stance that price stability is the Fed’s prime objective, he struggled to provide a solid reason for not hiking rates. As the markets had assigned 34% odds of a rate increase, Warsh not joining dissenters in favour of a rate increase and lack of a clear explanation of as to why the Fed did not hike rates despite elevated inflation, led to a sharp decline in two-year yields and Dollar Index. Precious metals and other commodities rebounded.

 

The Bank of England left its key interest rate unchanged at 3.75% Thursday, signaling that it stands ready to raise borrowing costs should high energy prices stoke inflation concerns further. The Bank now expects inflation to peak at 3.2% in the fourth quarter and return to its 2% target by early 2028.

 

Bank of Japan is expected to keep its benchmark rate unchanged at 1% in its monetary policy meeting on July 31.

 

Data roundup

Raft of US data released Thursday failed to ease intense downside pressure on the US Dollar. Matching the estimate, US real personal spending came in at 0.4%. Real GDP growth cooled to annualized 1.5% in 2Q from 2.1% in 1Q and fell short of the median forecast of 2.0%. The GDP growth rate was dragged down by U.S. trade deficit and smaller inventory replenishment that effectively reduced 1.7 percentage points from the economy's growth rate. 

 

However, indicating strong underlying domestic demand, real final sales to private domestic purchasers — consumer spending plus fixed investment — accelerated to 3.9% from 1.7%. Personal consumption rebounded sharply to 3.2% from 0.5% in Q1. PCE price Index, Fed's preferred gauge of inflation, cooled down from 4.1% in May to 3.7%, in line with the expectation. However, PCE inflation remains well above the Fed's goal of 2%. The Index fell 0.1% on monthly basis (forecast -0.1%). Similarly, June core PCE price Index at 0.1% m-o-m and 3.3% y-o-y matched their respective forecasts and were cooler than prior data.

 

Dollar Index and yields

Dollar Index has been hit hard by a dovish FOMC outcome, slightly lower oil prices and disappointing US Q2 GDP data. However, the greatest factor behind the weakness appears to a sharp appreciation in the Japanese Yen that surged over 3% against the US Dollar, biggest gain since December 2023. Sharp spike in the Japanese currency could be due to intervention by the Japanese central bank. It is to be noted that Yen fell to 163.99 - a fresh 40-year low on July 23. 

India's central bank is said to have spent $7 billion in its currency intervention on July 24. It sold Dollar on both onshore and offshore markets to defend the domestic currency as it approached record low.

 

At the time of writing this article, the Dollar Index, extending its decline to the third consecutive day, was trading at 98.89, lowest level since June 17. The Index has slumped over 2% in three days.

 

Two-year US yields fell for the fifth straight day; yields at 4.23% were down 3 bps. Ten-year yields at 4.67% were steady. While 2-year yields have fallen 14 bps from the cycle high, 10-year yields are down merely 4 bps as term premium and inflation concerns keep long-term yields relatively elevated.

 

World Gold Council: Q2 report

According to the World Gold Council (WGC), central banks bought 289 tons in Q2, a record high; however, Q1 quantum was revised sharply lower from 244 tons to 57 tons in the first quarter, the weakest start to a year in well over a decade.

 

WGC expects central banks' gold purchases to decline this year, after a rebound in demand in the second quarter, with the overall pace of purchasing likely to fall below 2025.

 

The Council also noted that bar and coin demand fell about 3% y-o-y to 307 tons, Jewellery demand was down 17% to 278 tons, the lowest since the pandemic, as recycled supply dropped 6% to 326 tons.

 

ETF and COMEX inventory

As of July 29, total known global gold ETF holdings stood at 96.65 Moz. 

 

ETFs have attracted a net inflow of 0.49 MOz since hitting the cycle low of 91.16 MOz on July 20; however, holdings are still down 1.99 MOz YTD as outflows since the beginning of war amount to 4.27 Moz.

 

Registered COMEX gold inventory at 14.74 MOz is at two-year low.

 

Upcoming data

Key US indicators on tap in near term include July final University of Michigan sentiment and inflation expectations (July 31), July ISM manufacturing (August 3), June JOLTs job openings (August 4), July ADP employment change (August 5), July ISM services (August 5) and July nonfarm payroll (August 7).

 

China's July manufacturing PMI (July 31), non-manufacturing PMI (July 31), RatingDog manufacturing PMI (August 3), ratingDog services PMI (August 5) and July trade balance (August 7) will also be on investors' radar.

 

Out of Europe, focus will be on Eurozone's July CPI (July 31), July manufacturing PMI (August 3) and services PMI (August 5) along with the UK's July manufacturing PMI (August 3) and services PMI (August 5).

 

Outlook

Weakness in Q2 US GDP data is somewhat overstated as real final sales remain strong. Meanwhile, weakness in Dollar Index is unlikely to last due to safe haven demand coming on volatile situation in the Middle East, though it is tough for the greenback to overcome the strong resistance at 101.80/102 mark.

 

Crude oil prices continue to be a source of inflationary concerns as the Middle East situation remains quite uncertain. However, it appears that in this cycle of strike-peace talk-strike, downside in oil prices would be contained as Iran asserts itself.

 

Dovish FOMC outcome is supportive of higher gold prices in very short term, though oil prices can cut the rally short.

 

Overall, we still expect that the shiny metal will continue to trade in its five-week range of $3950-$4200. Short-term traders may buy the dips with a stop-loss below $4000 for a possible move to $4170/$4200 provided oil does not spike higher. Interim support is at $4070/4040, while resistance is at $4125/$4150/$4170.