Gold is hovering in the overbought zone, but the upside is still pending

Gold, of late, has stopped reacting much to traditional drivers like US yields, US dollar index, key macroeconomic data etc. as the bulls are now mainly focused on uncertainties over the outcome of the US presidential election. Additionally, the metal is also extending its gains on synchronized global rate cuts, ETF flows and geopolitical factors.

Spot gold closed up more than 1% at $2721 on Friday and gained about 2.2% for the week.

Geopolitical Clock

The Biden administration is pushing for an end to the Gaza war after the killing of Hamas leader Sinwar; However, both Hamas and Israel want the fighting to continue. The safe-haven appeal of the metal is fueled by geopolitical tensions supporting the raging war in the Middle East.

US dollar index and yield

The US dollar continues to benefit from a string of strong US data and markets’ expectations that Trump will win the US presidential election as tariff hikes could be positive for the greenback, at least in the short term. The US dollar index, though it retreated on Friday, is sharply above the cycle low of 100.15 reached on September 27. The index, which recorded a third consecutive weekly gain at 103.46 on Friday, was up about 0.60% on the week. The 2-year US yield closed at 3.95% on Friday, flat on a weekly basis, while the 10-year US yield rose nearly 1 bps on the week to 4.07%.

Data/event round-up

US data released in the week ended October 18 was mostly encouraging with Retail Sales Advances (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 estimates. PPI readings (September) were mixed.

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

Upcoming data and events

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

ETF

Total known global gold ETF holdings hit an eight-month high of 83.766 MOz on Oct. 17, up from last week’s level of 83.424 Moz as investors continue to pour into the metal on global rate cuts, geopolitical concerns and uncertainties. US presidential election.

LBMA Survey 2024

Gold is expected to hit more fresh record highs in the coming year, according to a survey of the bullion industry at the London Bullion Market Association conference this week. Respondents comprising traders, refiners and miners expect the yellow metal to rise to $2941 by the end of October next year.

Outlook

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

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

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

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