Gold Trades Near $1,800, Set to Edge Higher in October

October has been a great month for gold after a 5% decline seen last month. At the end of this week, the precious metal has recovered previous losses on slowing US economic growth and inflation worries. Still, longer timeframes suggest that gold has been correcting since its record high in 2020. This is a crucial time for the safe haven, as the price action has formed a symmetrical triangle and has to decide whether to break above its resistance or below the support.

Since the beginning of the month, gold has gained over 2.6% to trade near $1,800. Last week, the price broke above the psychological level of $1,800 for the first time since mid-September.

What comes next is really important because it may define the formation of the next major trend, as the price has been moving inside a symmetrical triangle since peaking last year at over $2,050.

Gold Concludes October on Upbeat Note Amid Disappointing US GDP Data

The precious metal is about to end higher this week and over the month. The demand has been driven by a weakening US dollar, as the greenback has declined on slowing US economic growth. Official data released on Thursday showed that the US GDP grew at the slowest pace in over a year.

Gold futures added 0.3% on Thursday alone to break above $1,800. David Meger, director of metals trading at High Ridge Futures, told Reuters:

Economic growth slowed in the US and that would support the gold market in the perspective that the Federal Reserve would be less likely to either taper asset purchases at a quicker pace or the outlook for higher interest rates would be curtailed.”

Preliminary data from the US government showed that GDP grew only 2.0% in Q3 year-on-year, as the increase in the number of COVID cases extended the impact on global supply chains, causing a shortage of goods. Economists anticipated growth to slow to 2.7% after accelerating by 6.7% in the second quarter.

The USD Index, which tracks the dollar against six other currencies, dropped by over 0.6% to a one-month low, which resulted in a cheaper gold price for non-US traders.

Earlier this week, gold rose on inflation worries, as US Treasury yields declined. Investors argued that the Federal Reserve would have to respond more promptly to the inflationary pressure, which doesn’t seem to go away anytime soon.

On Friday, Fed Chairman Jerome Powell said the central bank had to begin reversing its bond-buying program.  

Jeffrey Halley, senior market analyst for Asia-Pacific at OANDA, said in a note on Monday:

Gold’s challenge will be whether it can weather an FOMC tapering announcement next week, especially if, as expected, U.S. yields and the dollar start their move higher again.”

Gold Demand Tumbles in Q3

A separate report released by the World Gold Council (WGC) on Thursday showed that demand for gold dropped in Q3 to the lowest since the end of last year, as investors sold the metal, reiterating the bearish mood during the July-September period.

Still, demand from jewellers, central banks, and smaller retail investors buying gold bars and coins was solid, the report noted.

Total demand for gold over the three months to September was 831 tons, down from 894.4 tons in the same period in 2020 and 1,084.9 tons in Q3 of 2019. The numbers demonstrate the ongoing impact of the pandemic. The decline has been driven by outflows from global exchange-traded funds (ETFs), which saw outflows of 26.7 metric tons. Previously, large investors hoarded gold amid recession worries, but recently the risk appetite has increased as the global economy is reviving.

WGC’s senior market analyst Louise Street said that for 2021 as a whole, “strong consumer and central bank demand will mitigate losses from ETFs. Jewellery demand will continue to exceed last year’s levels, but investment demand in total will be weaker in 2021, despite healthy bar and coin demand.”

Source: https://www.reuters.com/business/gold-demand-fell-third-quarter-big-investors-sold-says-wgc-2021-10-28/

Meanwhile, China’s gold consumption surged in the first nine months of 2021, the China Gold Association said on Thursday. Demand in the largest gold market in the world continues to recover from the impact of the pandemic. On the other side, production dropped due to safety inspections.

Consumption in China came in at 813.59 tons in January-September, up 48.4% from the same period in 2020, and 5.9% higher than pre-pandemic levels in the first nine months of 2019.

Consumption was driven by jewelry sales during the Qixi Festival two months ago and the Mid-Autumn Festival in September. At the same time, gold production in China tumbled by 10%. The decline is the result of more rigorous safety inspections in Shandong, China’s main gold-producing province, after several fatal gold mine accidents at the beginning of 2021.

What’s Next for Gold?

Gold will continue to find strong resistance at $1,830, which has been tested on several occasions since June. Investors are waiting for the Fed’s meeting scheduled on November 2-3 to see whether it’s more hawkish and whether it starts tapering bond buying.  

StoneX analyst Rhona O’Connell stated:

Tapering should already be well and truly discounted, although there is bound to be a short-lived knee-jerk reaction to the Fed’s statement next Wednesday – there always is.”

When it comes to longer-term forecasts, it seems that gold will test new highs after it breaks above the triangle’s resistance level. Part of the reason relates to the inflationary pressure that will see the metal leveraging its safe-haven status. Investors consider gold as a great hedge against inflation, which exceeds expectations in most developed economies due to the ultra easy monetary policies imposed by central bankers to spur economic growth.

David Meger explained:

Gold being considered one of the quintessential hedges against inflationary pressures is an underlying supportive factor for the bullion market moving forward, and we see both gold and silver prices moving higher in the weeks ahead.”

Agnico-Eagle Mines Ltd. CEO Sean Boyd told Bloomberg that the metal could update the record high within the next 12 months as investors will seek a refuge from inflationary pressures. That means that gold would end up trading near $2,100 next year, as per Boyd’s view, who believes high prices will stay for longer than the Fed claims. He stated:

Inflation is not transitory. We’ll see higher inflation as we move down the road, which is generally a very favorable environment for gold.”

All in all, November will be an important month for the metal, as it may define the next major trend.

 

 

 

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