Gold trades in a tight band with constructive bias; dip buying favoured

Performance:

On December 4, spot gold traded in a rather narrow range between $4,175 and $4,217. The yellow metal, at the time of writing this article, was trading at $4,213, up nearly 0.2 per cent for the day, even as the US yields firmed up.

 

Earlier, in the week ending November 28, gold surged 4.28 per cent to $4,239, on Fed rate cut hopes and a drop in the US yields. Extending its monthly rally to November, the metal has risen for four straight months.   

Gold ETF and COMEX Inventory:

 

Total known global gold ETF holdings stood at 97.655 MOz as of December 3, which is nearly a 3-year high level; holdings are up 17.86 per cent year-to-date (Y-T-D) (461 tons). Net inflows amounted to 0.20 MOz in the week ending November 28. The holdings, up sharply this year after four consecutive years of decline, continue to underpin gold prices.

 

 

Eligible COMEX Gold inventory was noted to be 18.40 MOz as on December 3 -- the highest level since October 29, though down nearly 18 per cent from the cycle-high of 22.45 MOz seen on April 14. 

Data roundup:

US weekly jobless claims fell to 191,000, a three-year low, against the forecast of 220,000 as even continuing claims fell from 19,43,000 to 19,39,000 against the estimate of 19,63,000.

 

The ADP Employment Report released on December 3 showed that US private-sector employment fell by 32,000 jobs in November against the forecast of a rise of 10,000 jobs, which is the worst fall since 2023. 

 

Weak job data led bounce in gold was checked by ISM services coming in at 52.60, that beat the forecast of 52, though the employment Index contracted for the seventh straight month.

Indian Rupee falls to a record low:

 

Beset by uncertainty over the US-India trade deal and a record $41.70 billion trade deficit in October, up from $26.7 billion in August, as domestic investment demand for precious metals has sharply picked up, the Indian Rupee has plummeted to a record low against the US Dollar.

 

RBI stepped aside as it probably wants to build reserves rather than selling to support the INR, as RBI's forex assets rose by $600 million in the week ending November 21. Tax collections show that lower GST rates are boosting foreign goods demand rather than demand for domestic goods. 

US Dollar Index and yields:

The US Dollar Index has fallen sharply from its recent high of 100.40 seen on November 21 as the Fed leaders, including governor Waller and NY Fed President Williams, called for a rate cut in December.

 

At the time of writing this article, the US Dollar Index was trading around 98.92, up around 0.1 per cent for the day. Two-year yields that fell 2 basis points (bps) to 3.49 per cent in the week ending November 28 are currently hovering around 3.52 per cent, up 1 per cent for the day.

 

Ten-year yields at 4.10 per cent are up by around 0.75 per cent for the day.

 

Both two-year and 10-year yields have risen around 2 per cent from their recent lows reached on November 26 due to heavy corporate bond issuances and reassuring ISM services and weekly job data. Meanwhile, Japan's bond yields continue to move higher on proposed fiscal stimulus, December rate hike possibility and continuing tiff with China.

 

Ten-year JGB yields rose to 1.94 per cent, the highest since July 2007. 30-year JGB yields surged to a record high of 3.44 per cent before falling nearly 1 per cent.

December Fed rate cut probability:

December Fed rate cut probability, although down from 90 per cent to 87 per cent since yesterday, remains quite high as markets price in a December Fed rate cut. 

Central banks continue to buy gold:

Global central banks boosted gold purchases in October despite prices record high. As per the latest WGC data, net purchases reached 53 tons in October, up 36 per cent from September, and the strongest monthly buying this year. Global central banks have bought a net 254 tons this year. China extended its buying streak to a 12th month, adding about 1 ton.

Geopolitics watch:

Ukraine-Russia peace deal remains elusive as Russian President Vladimir Putin said some points in a US-backed peace plan to end Moscow’s war were unacceptable to him. US President Donald Trump reiterated that the US would start striking alleged drug cartels on land in Venezuela very soon.

Upcoming data and events:

Investors will closely monitor US PCE Price Index (Sep.), real personal spending (Sep.) and University of Michigan Sentiment (Dec. prel.) data to be released today. JOLTs job openings data (October) will be released on December 9.

 

The Federal Reserve will announce its monetary policy on December 10. It is widely expected that the central bank will cut the Fed Fund rate by 25 bps. Fed's communication blackout period will last until December 12, so there will not be any guidance from the Fed officials until then.

Outlook:

Weakening US labour market, geopolitical concerns, and Fed rate cut hopes continue to support gold prices. Troubles brewing at Vanke, a leading Chinese property developer, also support the metal as the developer asked for a 12-month extension to pay principal on a 2 billion yuan ($283 million) note due Dec. 15. US PCE Price Index (Sep.) would be somewhat dated. The October CPI report will not be released.

 

Gold is expected to remain well bid on the confluence of supporting factors. It will not be surprising to see gold rising to fresh record highs (above $4381 – the ATH) in the coming weeks.

Dip buying remains the preferred strategy. Support is at $4160/$4100. Resistance is at $4245/$4300.

 

Note: Volatility in the Indian Rupee needs to be monitored.

 

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