Geo-political tension remains a strong tailwind for gold. Buy yellow metal on dips

Spot gold traded between $2564 (18/11/2024) and $2716 (22/11/24) in the week ended November 22 as it staged an impressive recovery after a decline of nearly 5% in the week ended November 15.

The metal surged on safe haven demand fuelled by concerns over Russia-Ukraine war that intensified following Ukraine firing American ATACMS and the British Storm Shadow long-range missiles inside Russia. Russia retaliated by firing a new kind of ICBM; thus, aggravating the geopolitical situation.

Spot gold closed with a huge gain of 1.76% at $2716 on November 22; it was up over 2% on the weekly basis; thus, it has recovered most of its post Trump victory losses.

In a notable development, the metal hit a record high in the Euro terms on Friday.

Friday’s US data were mixed as the S&P Global Services PMI (November) came in at 57 (forecast 55) but manufacturing PMI at 48.80 fell short of the forecast of 48.90. University of Michigan sentiment (Nov. final) at 71.80 fell short of the forecast of 73.90. The PMIs out of the Eurozone were disappointing as services PMIs of Germany (49.40 Vs the estimate of 51.70) and the Eurozone (49.20 Vs the forecast of 51.60) unexpectedly contracted. Germany’s Q3 final GDP came in at 0.10%, falling short of the forecast of 0.20%.
The UK data were no better: retail sales in October (-0.90% m-o-m, estimate -0.40%), manufacturing PMI in November (48.6, estimate 50) and services PMI (50, forecast 52) painted a picture of deteriorating economy.
The US continuing claims reached three-year high even as jobless claims remain at a comfortable level.

Total known global gold ETF holdings were noted at 82.987 MOz on November 21 as compared with 83.118 Moz at the end of the prior week. Thus, the holdings are sharply down from the cycle high of 84.143Moz on October 23.

On Friday, the US Dollar Index surged to 108.07, a 2-year high of 108.10, on weak European data and heightened geopolitical tensions. The Euro fell to the lowest level against the US Dollar since 2022 as the zone’s private sector unexpectedly slipped into a contraction for the first time since January.

The Dollar Index was up 0.49% on Friday; its weekly gain was nearly 0.80%.

The ten-year US yields were nearly steady at 4.41% on Friday and were down 3 bps on the week, whereas the 2-year yields at 4.38% were up around 0.75% on a daily basis and were up nearly 2% on the week.

The major US data slated to be released next week include new home sales (October), Conference Board Consumer confidence (November), FOMC meeting minutes (November 7), GDP (3 Q, secondary reading), personal income and spending (October), PCE Price Index (October)– the Fed’s gauge of inflation (October). CPI estimates (Nov. prel.) of Germany and the Eurozone, job data (Nov.) of Germany and France, and GDP (Q3 final) of France will also be in focus.

Chicago Federal Reserve President Austan Goolsbee supported further interest rate cuts, albeit going more slowly. Federal Reserve Bank of Richmond President Tom Barkin said he expected inflation to continue dropping across the U.S but cautioned that the US is more vulnerable to inflation shock than in the past. Federal Reserve Bank of New York President John Williams said that he sees inflation cooling and interest rates falling further.

Spot gold has erased almost all its sharp losses that it experienced on Trump’s victory in the US presidential election. Geopolitical factors continue to act as an enormous tailwind as traders are concerned over the ominously evolving situation in the Russia-Ukraine war. With the use of a medium-range new type of missile that can carry nuclear payload, Putin has made his intentions clear. The threat of Russia using a tactical nuclear weapon looms large. At the same time, the West continues to up the ante as the US sanctioned the Russian bank Gazprom on Friday to hurt the latter’s natural gas exports.

In the present scenario, buying the dips has once again become the preferred strategy. Bulls eye the next crucial resistance at $2750 a breach of which will put the all-time high level of $2790 in their focus. Support is at $2685/$2661/$2640.

If there are no major geopolitical disconcerting developments in the weekend, the metal may slide at the beginning of the week. However, dips should be bought into as multiple risks abound, more so as the European economy looks fragile.

(The author is Associate Vice President, Fundamental Currencies and Commodities at Sharekhan by BNP Paribas)

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