Gold hovers in an overbought zone, but upside still left

Gold, of late, has stopped showing much reaction to traditional drivers like the US yields, the US Dollar Index, key macroeconomic data, etc as bulls are now focused primarily on uncertainties over the US presidential election outcome. In addition, the metal is extending its gains on synchronised global rate cuts, ETF inflows and geopolitical factors also.

Spot gold closed with a gain of over 1% at $2721 on Friday, and was up nearly 2.2% on the week.

Geopolitical watch

The Biden Administration is pushing for an end to the Gaza war following the killing of the Hamas leader Sinwar; however, both Hamas and Israel intend to continue fighting. Safe haven appeal of the metal due to geopolitical tensions continues to be supportive of the raging Middle East war.

US Dollar Index and yields

The US Dollar continues to benefit from a string of strong US data and markets’ expectations of Trump winning the US presidential election as an increase in tariffs may be positive for the greenback in the short term at least. The US Dollar Index, though it retreated on Friday, is sharply up from the cycle low of 100.15 reached on September 27. The Index, recording the third straight weekly gain, at 103.46 on Friday, was up around 0.60% on the week. The 2-year US yields closed at 3.95% on Friday, flat on a weekly basis, whereas the ten-year US yields at 4.07% were up nearly 1 bps on the week.

Data/event round-up

The US data released in the week ending on October 18 were largely encouraging as retail sales advance (September), NAHB housing market index (October), Philadelphia Fed Business outlook (October), housing starts (September) and weekly jobless claims (October 12) topped their respective estimates, while industrial production (September), Empire manufacturing (October) and University of Michigan sentiments trailed their respective forecasts. PPI readings were (September) mixed.

The European Central Bank, as expected, cut the benchmark rate by 25 bps, as the region’s revised CPI at 1.70% (September) fell further below the bank’s target and the economy continues to struggle. The Bank is expected to cut rates again in December. Data out of China were somewhat encouraging as 3Q GDP annualized GDP came in at 4.60% (forecast 4.50%); industrial production in September was noted at 5.4% y-o-y (forecast 4.6%); and retail sales (September) at 3.20% YoY beat the forecast of 2.50%.

Upcoming data and event

The People’s Bank of China is expected to cut 5-year and one-year Loan prime rates by 20 bps on October 21. Investors will closely watch the US S&P Global PMIs (October preliminary), existing home sales (September), weekly jobless claims, durable goods orders (September Preliminary) and University of Michigan Sentiment (October final). Fedspeak will also be parsed for clues to the pace of the Fed rate cuts. The UK’s and the Euro-zone’s PMIs will be on investors’ watchlist, too. Apart from these data and events, the BRICS Summit to be held in Kazan, Russia, from October 20 to October 24 is also attracting investors’ attention on the account of its De-Dollarisation agenda.

ETF

Total known global gold ETF holdings stood at eight-month high of 83.766 MOz as on October 17, which is higher than the last week’s level of 83.424 Moz as investors continue to pile into the metal on global rate cut spree, geopolitical concerns and uncertainty over the US Presidential elections.

LBMA survey 2024

Gold is expected to climb further to fresh record highs over the next year, according to a survey of the bullion industry at the London Bullion Market Association conference held this week. Respondents that include traders, refiners and miners expect the yellow metal to rise to $2941 by late October next year.

Outlook

Gold is looking somewhat overbought at current levels. Shanghai gold premium has flipped into a discount since September 30. However, upcoming BRICS summit in Russia, uncertainty over the US presidential election outcome and ETF inflows continue to support the metal. Positive views on the metal in LBMA Survey also support the metal.

Gold is expected to trade with a positive bias with the next major upside target being $2800. Interim resistance is at $2750. Support is at $2700/$2685/$2670.

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

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)