Gold gains for second consecutive week as Middle-East tension intensifies

In the past week, gold prices experienced a second consecutive rise, largely driven by the ongoing conflict in the Middle East, which has created significant uncertainty in financial markets. The week began with a slight dip in COMEX gold prices, but a remarkable one-sided rally ensued. The escalation of the Israel-Hamas conflict heightened the demand for safe-haven assets, and gold benefitted from this surge in demand.

Interestingly, this increase in gold prices occurred even as US 10-year treasury yields rose to 5%, primarily due to robust economic data in the United States. The Middle East conflict escalated with drone attacks on US bases in Iraq and Syria, and an American destroyer intercepted cruise missiles aimed at Israel by Houthi rebels in Yemen. These events raised concerns about the potential for the conflict to escalate into a broader US-Iran confrontation. Additionally, Israel’s buildup of troops along the Gaza border heightened tensions in the region.

In terms of economic data, US retail sales advanced by 0.7% in September 2023, following an upwardly revised 0.8% increase in August. US manufacturing production rose by 0.4%, and industrial production increased by 0.3% in September, surpassing expectations. Weekly jobless data showed a decline in the number of Americans filing for unemployment benefits, reaching the lowest point since January at 198,000. However, US existing home sales hit a 13-year low due to soaring mortgage rates, which deterred homeowners from selling their properties.

Notably, the robust economic data pushed the yield on US 10-year notes to a 16-year high of 5.001%. Federal Reserve Chair Jerome Powell indicated the central bank’s intention to maintain current interest rates at its next meeting, while keeping the possibility of future rate hikes open in the event of continued strong economic growth. Furthermore, higher interest rates were highlighted as a challenge for first-time homebuyers, as they increase borrowing costs and limit housing inventory, leading to higher home prices.

In the realm of investment demand, holdings in the SPDR Gold ETF reached a four-year low at 848.24 tonnes as of October 19th. However, by the end of the week, these holdings increased slightly to 863.25 tonnes, compared to 862.37 tonnes the previous week. The decline in ETF activity is linked to rising real interest rates in the US, which reached a 15-year high of 2.47% for 10-year TIPS. This trend has diminished the appeal of non-yielding gold, indicating that the recent 9% increase in gold prices since October 6th was primarily due to speculative safe-haven demand.

For the upcoming week, market attention will be focused on Western flash PMIs, the ECB policy meeting, US Q3 GDP, and the PCE price index. The resilience of the US economy has been surprising thus far, and investors will be closely monitoring whether this momentum continues into the third quarter. The Iran-Hamas conflict remains in the spotlight, and any escalation could have significant implications for global markets. Given the prevailing uncertainties, it is anticipated that gold prices will remain well-supported.
In our previous week’s article, we anticipated gold’s potential to reach $2000 per troy ounce, contingent on surpassing the $1968 resistance. This projection became a reality as gold prices touched a high of $2009 per troy ounce, a level not seen since July 2023. Notably, the price action suggests a break from a descending channel, bolstering the bullish outlook. The recent $2009 mark has formed a double top, and breaching this level could propel prices towards the all-time highs, reaching approximately $2080 per troy ounce.(The author, Ravindra V Rao, is Vice President-Head Commodity Research at Kotak securities Limited)

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