Is gold poised for sharp corrections at $1999?

Waning fear in the marketplace takes its toll on the precious metal’s safe-haven allure


Issac John

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Commodity experts say that gold continues to be driven by global geopolitical factors. — File photo
Commodity experts say that gold continues to be driven by global geopolitical factors. — File photo

Published: Sun 5 Nov 2023, 7:30 PM

As gold price remains close to $2,000 an ounce, its inability to convincingly surpass that mark is creating some cautious sentiment in the marketplace with analysts predicting that the yellow metal could suffer sharp corrections.

The precious metal closed October trading at $1,999 an ounce after an unstoppable surge, rallying from near the $1,800 level at the beginning of October to a six-month high of $2,009 an ounce, recording a gain of over 21 per cent year-on-year.

Commodity experts said that gold continues to be driven by global geopolitical factors as waning fear in the marketplace takes its toll on the precious metal’s safe-haven allure. "The geopolitical crisis that has fuelled gold’s rally is becoming exhausted,” said Christopher Vecchio. While a geopolitical event can provide the gold market with some momentum, it does nothing to attract long-term investors, he said, noting that a gold rally based on a specific geopolitical event needs to see constant escalation to maintain its safe-haven bid.

However, some experts believe that a quiet week ahead could see gold approaching record highs if US yields continue their decline.

Ole Hansen, head of commodity strategy at Saxo Bank, noted that a consolidation around current levels would be healthy. The neutral outlook comes after gold saw a nearly 7.0 per cent rally in October, its best monthly performance since March.

"Gold has paused after rallying almost 200 dollars last month after profit-taking emerged once again above $2,000 per ounce. Having rallied so hard in a short space of time, the market needs consolidating, but so far, the correction has been relatively shallow, with support appearing at $1,953, ahead of $1,933, the 200-day moving average and 38.2 per cent retracement of the mentioned rally,” said Hansen.

On the downside, Hansen said that gold prices would have to fall back to $1,900 an ounce to put this new uptrend at risk.

Commodity analysts said amid a barrage of challenges from escalating geopolitical conflict in the Middle East, tightening oil supply, which could reignite inflationary pressures to growing concerns of a potential credit risk event and of course the possibility of US government shutdown in mid-November, the Federal Reserve’s move to hold its benchmark interest rate at a 22-year high is a clear sign that officials think the risks confronting the global economy have become much more complex. The US Federal Open Market Committee has skipped an interest rate increase again and left rates unchanged at the current range of 5.25 per cent to 5.5 per cent.

The Bank of Japan and the Bank of England also decided in line with expectations, keeping the monetary policy stance unchanged at their respective meetings.

Barbara Lambrecht, commodity analyst at Commerzbank, said in a note that the Fed has left the door open to another rate hike. “Even though we are confident that interest rates have already peaked, market participants are nonetheless likely to remain cautious in this respect. Assuming there is no further escalation in the Middle East, the upside potential for the gold price will probably be severely limited.”

The World Gold Council in its latest report noted that gold purchases by central banks surged to a record high of 800 tonnes between January and September amid inflation in the US and Europe's richer nations and mounting geopolitical uncertainties.

The central banks of China, Poland and Singapore were among the largest buyers, leading to a 14 per cent year-on-year growth, data from the report showed.

"With central bank demand resuming its voracious pace after a slower Q2, we expect the annual total to approach last year's record, and there's an outside possibility it will exceed that figure," the WGC said.

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