Gold outlook: Rate cut supports long-term upside; buy on dips, says analyst

Gold: Slightly lower as the US job data alleviate labour market concerns

Gold Performance:

• Spot gold hit a new record high of $3,707 on September 17 as the US Federal Reserve cut the Fed Fund overnight rate by 25 bps to 4-4.25 per cent range and signalled two more rate cuts by the end of the year. The US Dollar Index slumped to a 43-month low as US bonds rallied on the FOMC's monetary policy decision. However, Dollar and yields reversed their course to rise sharply as the Fed Chair Powell flagged tariff-induced inflation risk during his presser. He called the rate cut as a risk mechanism. Spot gold closed with a loss of around 0.90 per cent at $3,659.90 on September 17.
• The metal had been mostly stable on September 18; however, it came under pressure in the US session due to robust US weekly job data. Spot gold was trading around 0.5 per cent lower at $3,638 at the time of writing this article. The MCX October gold contract at ₹108,975 was down by around 0.80 per cent.

FOMC’s monetary policy decision:

• Ten Fed officials called for 50-bps/more rate cuts, while nine called for fewer.
• Newly appointed Fed governor Stephen Miran, the only dissenter, voted for a 50-bps cut and 125-bps rate cut by the end of the year.
• New dot plot: The Fed sees a quarter point rate cut in 2026. 2026 growth and inflation were revised slightly higher, while unemployment rate revised slightly lower.

Data roundup:

• Initial jobless (US) claims fell from 264K (revised higher from 263K) to 231K Vs the forecast of 240K in the week ending September 13. It is to be noted that in the week ending September 6, weekly jobless claims spiked from 236K to 263K, nearly four-year high. It was suspected that Labor Day holidays in the US might have distorted the picture. This is why September 13 data was crucial. Continuing claims fell from 1,927K to 1,920K, much lower than the expected 1950K.
• Philadelphia Fed Business Outlook (September) surged from -0.3 to 23.2, much above the estimate of 1.70 and highest level since February.
• Leading Index in August fell from revised 0.1 per cent to -0.5 per cent, trailing the estimate of -0.2 per cent and lowest since May.
• On September 18, Bank of England, as expected, held rates at 4 per cent in a 7-2 MPC voting as the Committee warned that future rate cuts will be gradual and careful and will depend upon the extent to which underlying disinflationary pressures continue to ease. It is to be noted that the Bank sees inflation rising from current 3.8 per cent to 4 per cent next month as household inflation expectations hit a 2-year high in August. BOE staff raised their estimate of third-quarter GDP growth to 0.4 per cent from 0.3 per cent, estimating that the underlying pace is now around 0.25 per cent a quarter. 

Europe becoming ungovernable:

• On September 18, Bloomberg ran a story highlighting the concerns that Europe's leaders beset by strained budgets, slow administration, political instability, and energized opposition from political extremes are struggling to govern their countries as they become increasingly powerless.

Dollar Index and US yields:

• The US Dollar Index extended its post FOMC presser recovery to the second day as weekly job data threw a positive surprise. The Index, at the time of writing this article, was hovering around 97.35, up nearly 0.55 per cent for the day. Rebuffed by the US data US bonds fell as ten-year US yields rose by 1 per cent to 4.12 per cent, 2-year yields rose 2 bps to 3.57 per cent. 

Gold ETF and COMEX inventory:

• Total known global gold ETF holdings stood at 94.73 MOz as on September 17, slightly down from the cycle high of 94.945 MOz registered on September 16, but near 3-year high level. ETF holdings are up 14.33 per cent YTD.
• COMEX gold inventory at 39.23MOz is at the highest level since May.

Trump-Xi call:

• President Donald Trump’s call with Chinese President Xi Jinping is scheduled to take place on Friday at 9 AM. Washington time. Being the first direct engagement between these two leaders since June, the call will be closely watched for indication of in-person meeting. US and China have reportedly reached a framework deal to preserve the US operations of TikTok under a national security law. 

China to ease restrictions on gold imports:

• China's central bank, in its attempt to liberalize the Chinese gold market, is planning to ease restrictions on gold imports by expanding the application of 'multi-use permits' extending their validity to nine months from six and removing limits on their use. Liberalizing the gold metal market will also regulate Yuan moves as appreciating currency hurts the nation's exports.

Upcoming data and events:

• Today's US data on tap include TIC flows (July) and Chicago Fed Nat Activity Index.
• Major upcoming US data include S&P global US PMIs (Sep. 23), new home sales (Sep. 24), Q2 GDP tertiary (Sep. 25) and existing home sales (Sept. 25).
• China's PBoC will deliver its rate decision on 1-year and 5-year Loan Prime rates on September 22, though economists call for no change in these rates.
• Japan's national CPI will be out on September 19 and is likely to show moderating but elevated inflation.
• The Eurozone's PMIs will be out on September 23.
• Bank of Japan will announce its monetary policy on the same day. The Bank is expected to keep the key rate steady at 0.50% despite high inflation.
• Swiss National Bank (SNB) will deliver its monetary policy decision on September 25 wherein the Central Bank is expected to hold its key rate steady at 0 per cent.

Outlook:

• The US Federal Reserve cutting rates by 25-bps is on the expected line, but the FOMC dot plot seeing two additional rate cuts by the end of the year is somewhat a dovish development as June dot plot saw only two rate cuts the year-end. Fed’s concerns over US job market is supportive for the yellow metal.
• Gold fell mainly on the US weekly job data and ‘buy the rumour, sell the news’ trading.
• The yellow metal may consolidate in near-term; thus, further downside correction is not ruled out. However, eventually, the Fed embarking on a rate cut spree will lead to higher prices in the coming weeks/months.
• Dips should be bought into for a possible short-term target of $3800 (MCX October gold Rs 113,800). Support is at $3600 (₹107,800)/$3550 (₹106.300)/$3500 (₹104,800). Interim resistance is at $3,710 (₹111,000).

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