Gold is in an overbought zone, but there is still upside potential

GoldLately, it has stopped showing much reaction to traditional factors such as US yields, US Dollar Index, key macroeconomic data, etc., as the bulls are now primarily focused on uncertainties over the outcome of the US presidential election. . Additionally, the metal is extending its gains thanks to synchronized global rate cuts, ETF inflows and also geopolitical factors.

Spot gold closed up more than 1% at $2,721 on Friday and was up nearly 2.2% for the week.

Geopolitical surveillance

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

US Dollar Index and Yields

The US dollar continues to benefit from a series of strong US data and market expectations that Trump will win the US presidential election, as an increase in tariffs may be positive for the dollar at least in the short term . The US Dollar Index, although retreating on Friday, is well above the cycle low of 100.15 reached on September 27. The index, which posted its third consecutive weekly gain to 103.46 on Friday, was up about 0.60% for the week. US 2-year yields closed at 3.95% on Friday, flat on a weekly basis, while US 10-year yields at 4.07% were up almost 1bp on the week.

Data/event summary

US data released in the week ending October 18 was largely encouraging, with advances in retail sales (September), the NAHB housing market index (October), the Fed’s trade outlook Philadelphia (October), housing construction (September) and weekly unemployment claims (October 12). ) beat their respective estimates, while Industrial Production (September), Empire Manufacturing (October), and University of Michigan Sentiments fell behind their respective forecasts. PPI readings (September) were mixed.

The European Central Bank, as expected, cut the benchmark rate by 25 bps as the region’s revised CPI to 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 from China was somewhat encouraging, with annualized Q3 GDP coming in at 4.60% (forecast 4.50%); industrial production in September stood at 5.4% year-on-year (4.6% forecast); and retail sales (September) at 3.20% year-on-year exceeded the forecast of 2.50%.

Upcoming data and event

The People’s Bank of China is expected to reduce prime lending rates for five and one years by 20 basis points on October 21. Investors will closely watch the US S&P Global PMIs (October Preliminary), existing home sales (September) and weekly jobless claims. , Durable Goods Orders (September Preliminary), and University of Michigan Sentiment (October Late). The Fed speech will also be analyzed for clues about the pace of Fed rate cuts. UK and Eurozone PMIs will also be on investors’ watch list. Beyond these data and events, the BRICS Summit to be held in Kazan, Russia, from October 20 to 24 is also attracting the attention of investors for its de-dollarization agenda.

ETFs

On October 17, total known gold ETF holdings globally hit an eight-month high of 83.766 Moz, up from last week’s level of 83.424 Moz, as investors continue to pile into the metal due to the surge. of global rate cuts, geopolitical concerns and uncertainty over the US presidential election.

LBMA Survey 2024

Gold is expected to continue rising to new all-time highs over the next year, according to a bullion industry survey at the London Bullion Market Association conference this week. Respondents, including traders, refiners and miners, expect the yellow metal to rise to $2,941 by the end of October next year.

Perspective

Gold seems somewhat overbought at current levels. The Shanghai gold premium has turned into a discount since September 30. However, the upcoming BRICS summit in Russia, uncertainty over the outcome of the US presidential election and ETF inflows continue to support the metal. The positive views on the metal in the LBMA survey also support the metal.

Gold is expected to trade with a positive bias, with the next major upside target being $2,800. Provisional resistance is at $2,750. Support is at $2700/$2685/$2670.

(The author is associate vice president of currencies and fundamental commodities at Sharekhan of BNP Paribas)

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