The bullish case for gold is firmly intact as expectations for monetary and fiscal stimulus continue to grow as deflationary readings and recession-like conditions persist.
Pritam Kumar Patnaik
Gold started last week on a weak note, extending losses from the previous week, but was supported by improving risk appetite after the US and China agreed to hold trade talks in October.
Prices also corrected amid speculation that US-Iran tensions would defuse after President Donald Trump fired national security adviser John Bolton, who was hawkish on the Islamic Republic.
Additionally, the US dollar remained above the 98 mark, supported by upbeat data. The US labour department reported that its consumer price index gained 0.3 percent for a third straight month. In the 12 months through August, the core CPI increased 2.4 percent, the most since July 2018, after climbing 2.2 percent in July.
This was bearish for gold because it suggested that consumer prices were strengthening despite a July rate cut by the Federal Reserve. US retail sales increased more than expected in August, pointing to a robust consumer spending, supporting a moderate pace of economic growth despite the ongoing trade tensions. This further weighed on bullion prices.
Later in the week, following the European Central Bank’s dovish and accommodative stance, a sharp $25-30/ounce swing trade was witnessed in gold.
The volatility continued when a Bloomberg report seemed to suggest that the Trump administration could seek an interim deal with China. The report was quickly denied by the US and gold remained above $1,500 in the international market.
However, before the week ended, we observed that short-term traders booked some profits heading into the weekend, probably abandoning their long positions ahead of the Fed meeting.
An easing of trade tensions between the US and China caused investors to rethink the risk of recession. This encouraged long bond investors to book profits, driving interest rates higher. Stock market investors, betting on a stronger economy, also began reducing their safe-haven gold purchases.
Meanwhile, SPDR trust fund data shows that investors pulled out some money, as holding in the week ending September 15 declined by 9.38 metric tonnes to 880.38 metric tonnes. Hedge funds and money managers reduced their bullish positions in Comex gold and silver contracts in the week to September 10 by 42,981 contracts to 247,728.
Comex Silver speculators cut net long positions by 1,904 contracts to 61,561 in the same week.
Domestic gold and silver prices tracked international prices and remain volatile and ended the week with big cuts.
Domestic gold futures fell by over 2.5 percent, while silver futures fell by over 4 percent in the week ending September 13. However, gold exchange-traded funds in India saw the highest inflows in more than six years, as investors poured in money seeking safe havens amid record high domestic prices.
Net inflows in August into gold ETFs rose to Rs 145 crore, the highest since December 2012, according to the Association of Mutual Funds in India data.
The bullish case for gold is firmly intact, as expectations for monetary and fiscal stimulus will continue to grow as deflationary readings and recession-like conditions persist.
Over the weekend, an attack on Saudi Arabia's oil facilities cut more than 5 percent of global oil supply and escalated tensions in West Asia. Markets started the week with a gap up and were trading with solid gains on the back of tensions in West Asia.
However, unless the situation escalates into a war, gold’s gains are likely to be limited. More importantly, this week’s Fed meeting will be key, rates cuts have been discounted. But, guidance from the Fed will be important. Dovish will support gold; less dovish/hawkish/neutral could keep the pressure on the yellow metal.
According to CME Fed Watch tool, 82 percent of people believe that rates will be cut by 25 basis points, however, this figure is down from last week number of 95 percent.
MCX gold October has been going through high volatility. The daily chart suggests that prices have been intact in upward moving channel and recently it managed to protect the same, which is a positive sign.
However, there is still no positive confirmation and one should wait for a clear breakout. Over the near term, if Rs 37,200 per 10 gram is intact on downside where 50 days EMA is placed, trend will remain positive. Only break of this level will indicate that trend is reversing on downside.
Strategy: Buy Gold October futures above Rs 38,400, with Rs 38,100 as stop loss and a target towards Rs 38,800 can be expected.
LBMA gold has arrived at the channel support along with lower Bollinger bands. This indicates that zone of $1,490-1,485 an ounce is the crucial support zone.
In last week prices spiked near $1,525 level, hence move above $1,525 is required for resumption of up move towards $1,560. On the other side, any break below $1,485 can result into deeper correction towards $1,460. One should wait for a decisive breakout.
(The author is Head Commodities at Reliance Commodities.)Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.The Great Diwali Discount!
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