Gold strategy: Yellow metal may extend its rally; Support at Rs 75,500

Gold hit a fresh record high of $2664 and closed with a hefty gain of 1.09 per cent at $2657.

Gold – a fresh record high as the US Dollar weakens and US yields turn lower

Performance

Commodities surged on a sizable stimulus package announced by China's Central Bank and the Chinese authorities on Tuesday.

The metal hit a fresh record high of $2664 and closed with a hefty gain of 1.09 per cent at $2657.

The US Dollar Index weakened on healthy risk appetite and weak US data as rate cut bets fuel dominant the trading sentiments. The US yields slipped on disappointing US conference board confidence data, which boosted the yellow further.

China's stimulus included RRR (required reserve ratio) rate cut by 50-bps, 7-day repo rate cut from 1.70 per cent to 1.50 per cent and reduction in down payment for second home buying to 15 per cent from 25 per cent. In addition, the medium-term lending facility (MLF) is likely to be reduced by 0.3 per cent.

People's Bank of China (PBOC) will also provide full coverage of loans for local governments purchasing unsold homes, up from the previous 60 per cent. The PBoC also announced at least 500 billion yuan ($71 billion) of liquidity support for stocks along with a swap facility allowing securities, funds and insurance companies to tap the PBOC to buy stocks. Traders expect more fiscal measures in the next few days as Xi’s 24-member Politburo is set to meet ahead of a weeklong annual National holiday starting October 1.

 

Data round up

Global manufacturing and services PMI data released on Monday fell short of expectations as the data out of the UK, the US and the Euro-zone trailed their respective forecasts, though the S&P Global US services PMI came in at 55.40 Vs the forecast of 55.20. US data released on Tuesday stoked fresh concerns about the US economy as Conference Board consumer confidence fell well short of expectations. The CB Confidence Index came in at 98.7 vs the forecast 104. Current conditions components slid from 134.6 to 124.3, the lowest reading since March 2021. The Conference Board data revealed that Consumer Confidence has hit its lowest level since August 2021 on employment and economic concerns. The labour differential metric fell to 12.6, reflecting a softening labour market.

US Dollar Index and yields

The US Dollar Index fell on weak CB confidence data and risk-on sentiments. The Index closed 0.57 per cent lower at 100.34 as it nears its cyclical low of 100.22. The Index can precipitate its decline if the crucial support at 100 yields. 

The ten-year yield plunged from 3.81 per cent, its highest level since September 4, to close 0.37 per cent lower as the CB Confidence data fell short of expectations. The two-year yields, more sensitive to monetary policy adjustments, was down 1.37 per cent, which steepened the yield curve.

Fedspeak

Fed Governor Michelle Bowman, who is usually hawkish, warned that risks to inflation remain significant. She called for "a measured pace of cuts" to prevent the risk of reigniting inflation.

Geopolitical watch
 

Geopolitical tensions remain elevated as Hezbollah urged Iran to attack Israel.

Outlook

Having cleared the resistance at $2650, the metal is well placed to extend its rally. Expectations of a soft US PCE deflator, due Friday, will keep the metal buoyant as the PCE data on an annualised basis is running short of the Fed’s 2 per cent goal. Gold’s safe haven allure is intact on heightened geopolitical tensions due to Israel-Hezbollah conflict. Traders will parse Fed Chair Powell’s speech on September 26 for clues to the size of rate cuts.

Gold bulls eye $2700 (MCX December contract Rs 77,000) mark in the near-term. Support is at $2650 (Rs 75,500)/2620 (Rs 74,700).

(Disclaimer: Praveen Singh is Associate VP, Fundamental Currencies and Commodities at  Sharekhan by BNP Paribas. Views expressed are his own.)