Long-term outlook remain intact for gold; analyst calls for higher prices

Sharp two-day decline in gold prices has made gold healthier as momentum-driven froth has largely subsided. Long-term fundamentals are intact and call for much higher prices

Gold: Recovers slightly following the sharpest decline since 2013

Performance

On October 21, spot gold fell from $4,375 all the way to $4,082, a decline of 6.69 per cent which happens to be the sharpest intra-day fall since 2013 and the 7th steepest decline since 2000.

 

The yellow metal tumbled as it failed to take out the resistance at all-time high level of $4,381.52 (October 20) due to softer demand post-Diwali and caution ahead of the release of the US CPI data (due on October 24) and two crucial meetings - Trump-Xi and Trump-Putin. Easing bad loan worries concerning US regional banks also weighed on the metal.

 

 

On October 23, the shiny metal recovered some of its losses and was changing hands at $4142, up around 1 per cent for the day, at the time of writing this article. The MCX December gold was trading at 1,24,350, up 2.05 per cent for the day.

Gold ETF holdings and COMEX inventory

Gold ETFs saw a net outflow of 0.28MOz on October 22, the biggest daily decline since mid-May, as the total known global gold ETF holdings stood at 98.64MOz, though still at the highest level since September 2022. Holdings are less than 2 per cent below the all-time high level of 111.25 MOz recorded on October 15, 2020, in the wake of the Covid period.

 

As of October 22, COMEX gold inventory stood at 38.96 MOz, down 13.55 per cent from the record high 45.07 MOz reached on April 4 – during the height of tariff wars.

Trade and tariff developments

President Trump announced substantial sanctions on Russia's two biggest oil companies Lukoil and Rosneft. The EU also approved a new sanctions package to ban imports of Russian LNG starting next year.

 

Oil surged 6 per cent on US sanctions on Russian oil companies as reportedly India's imports of Russian oil are likely to dwindle drastically. Even Chinese firms importing Russian oil are worried over US sanctions.

Dollar Index and US yields

The US Dollar Index at 99 was up around 0.10 per cent for the day. The US 2-year and 10-year yields jumped by 3 bps and 4 bps respectively as oil spiked higher. 

Geopolitics watch

US President Trump confirmed on Wednesday that the anticipated meeting with his Russian counterpart Putin, which was to take place in Budapest tentatively in two weeks, has been cancelled, though the Kremlin said that plans for a summit were still in the process of being finalized. Russia carried out nuclear missile tests and massive drills to showcase its strength.

 

The US will not provide Ukraine with Tomahawk missiles as the US President said it would take at least six months or even a year to train the Ukrainians in using the long-range missile system.

 

Trump cited good progress on talks with China; however, he said that he is not sure that the planned Trump-Xi meeting in South Korea will happen.

Data roundup

US existing home sales came in at 4.06 million in September, in line with the forecast.

Upcoming data

US CPI (September) will be released today, which will be crucial for the markets as elevated inflation may affect the Fed rate cut chances. S&P global US PMIs, University of Michigan sentiment and inflation expectations will also be released today.

 

Out of Asia, traders will monitor Japan's national CPI (September). The Eurozone's PMIs will also be on tap on October 24.

 

Next week, focus will be on US Conference Board consumer confidence (October 28), advance goods trade balance (October 29), 3Q advance GDP and Core PCE Price Index QoQ (October 30). The Eurozone's 3Q GDP data will be released on October 30.

 

The US FOMC rate decision due on October 29 will be the most important event as markets have discounted two more rate cuts by the year-end. The Fed is expected to cut rates by 25 bps.

 

The Bank of Japan will announce its monetary policy on October 30. wherein it is likely to keep its target rate unchanged at 0.50 per cent. 

Outlook

Sharp two-day decline in gold prices has made gold healthier as momentum-driven froth has largely subsided. Uncertainty over Trump-Xi and Trump-Putin meetings will keep the upside capped. Similarly, Fed rate cut on October 29 is expected to keep downside limited.

 

The metal may face renewed selling pressure should the US CPI data turn out to be hotter-than-expected.

 

Long-term fundamentals are intact and call for much higher prices. We look for a price of $5,000 by the end of 2026. In the short-term, spot gold is expected to trade largely between $4,000 and $4,200 until more clarity emerges on the geopolitical front. Next major support is seen at $3,950.

 

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