Gold may dip on stronger dollar; support lies at ₹1,11,500-₹1,10,800 levels

Gold: A firmer Dollar poses a risk, though downside seen limited

Performance

On September 25, spot gold traded between $3722 and $3762. The yellow metal retreated from its day's high as the US data threw upside surprises. The US economy recorded the fastest growth in Q2 in nearly 2 years as it was supported by strong consumer spending and brisk pace of business investment that expanded at a 7.3 per cent rate in Q2.

 At the time of writing this article, spot gold was steady at $3736, while the MCX October Gold contract at 112,678 was up by 0.1 per cent.

 

Data roundup

Final reading of US 2Q GDP showed that the US economy grew 3.8 per cent annualised rate Vs the forecast of 3.3 per cent as 2Q personal consumption was revised higher from 1.6 per cent to 2.5 per cent Vs the estimate of 1.7 per cent. Consumer spending is likely to pick up in early 2026 due to President Trump's tax law and lower rates, though the expected growth below 2 per cent is likely to be subpar. Core PCE Price Index QoQ paced 2.6 per cent, faster than the forecast of 2.5 per cent.  Average good trade balance for August at $85.50 billion was lower than the expected deficit of $95.40 billion. Durable goods orders surged 2.9 per cent in August Vs the estimate of -0.3 per cent as even ex transportation orders rose by 0.4 per cent, solidly higher than the forecast of 0 per cent. Initial jobless for the week ending September fell from 232K to 218K, lowest since July 18. Even continuing claims eased. Steep decline in jobless claims, which have been heavily influenced by fraud in taxes and technical errors in North Carolina, could be attributed to normalisation of Texas data. Existing home sales in August stood at 4 million, higher than the forecast of 3.95 million.

 

EU27 new car registrations rose 5.3 per cent in August following a rise by 7.4 per cent in July.

Fiscal concerns

UK gilts are witnessing weak demand at auctions as budget looms. The UK's Debt Management Office's sales of 5 and 30-year bonds have seen weak demand that by some measures fell to the lowest level in at least two years. South Korea's deficit stands at 10.4 per cent, largest among all the G20 nations as most of them run fiscal deficit.

Fedspeak:

 

On September 25, Federal Reserve Governor Miran said the Fed should cut rates rapidly as the economy is vulnerable and interest rate is highly restrictive because it is well above its estimate of 'neutral rate'. He urged the Fed to bring rates down to neutral level quickly, rather than moving slowly over the course of the year.

Dollar Index and US yields:

 

Dollar Index has been gaining upward traction as the Fed Chair Powell cited inflation concerns in his speech on September 23. The Index, at the time of writing this article, was trading at 98.40, up 0.52 per cent for the day.

 

US bonds came under pressure on encouraging US data, which sent yields higher. Ten-year US yields at 4.187 per cent were up by nearly 1 per cent as 2-year yields rose nearly 5 bps to 3.65 per cent. 2-year Yields have risen around 6 per cent since the September 17 FOMC low of 3.46 per cent.

Gold ETF

Total known global gold ETF holdings eased slightly from the cycle-high of 96.19 MOz noted on September 23 to 96.12MOz but remain at the highest level since October 2022. 

ETF holdings, up 16 per cent Y-T-D, have risen for four straight weeks and are on a track of the fifth straight weekly rise.

China plans to become a custodian of foreign sovereign gold reserves:

 

In a bid to strengthen its standing in the global bullion market, China’s Central Bank is planning to use the Shanghai Gold Exchange to get central banks in friendly countries to buy gold and store it within the country’s borders. China seeking this bigger role as a custodian of sovereign gold reserves would result in reduced reliance on the US Dollar and expansion of Yuan’s role in global finance and economy, which is positive for the metal.

Risk of US government shutdown

The US government runs a risk of a government shutdown in the month-end as Democrats insist that the Administration should reverse Medicaid cuts in Trump's bills passed earlier this summer. In addition, tax credits should be extended to make health insurance premiums more affordable. Market reactions could be subdued unless shutdown extends for more than a week or so.

Geopolitical watch

Russia's incursions into Estonia, Finland and Poland are being broadly seen as an act of aggression by NATO. President Trump in his speech on September 23 said that NATO nations should shoot down Russian aircrafts that enter their airspace. So far NATO allies have shown mixed reactions on this episode, though tension runs high.

Upcoming data

Today's major US data on tap include real personal spending (August), PCE Price Index (August) -- Fed's preferred gauge of inflation, and University of Michigan sentiment along with inflation expectations.

 

Next week will be quite crucial for markets as US ISM manufacturing (September), ISM services (September), ADP employment change (September) and nonfarm payroll report (September) will be released. Focus will be on PMIs out of the Eurozone, the UK, Japan and China, too.

 

Apart from the data, investors will also parse the speeches of Fed officials for their take on US monetary policy trajectory.

Outlook

Huge ETF inflows, expectations of rate cuts, fiscal concerns, elevated geopolitical and political tensions, and China’s step towards becoming a sovereign gold custodian act as a strong tailwind for the yellow metal. Risk is from stronger US Dollar as US data surprised on the upside; however, Dollar needs to maintain a sustainable upward traction to weigh more meaningfully on gold. 

 

Today’s US PCE price index may show persistent inflation, which could be somewhat bearish for the metal.

 

Gold may correct lower on a firmer Dollar as Fed largely remains cautious on rate cuts going forward. However, downside is expected to be limited.

 

Gold is expected to test the key $3800 (₹1,14,600) resistance in the coming months as the long-term target is $4000 (₹1,20,000). Support is at $3700 (₹1,11,500)/$3675 (₹1,10,800)/$3600 (₹1,08,500).

 

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