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Will gold trade against ‘safe-haven’ script for too long?

The price of gold traded back below the 50-Day SMA (simply moving average) of $1,718 to be on track to test the monthly low of $1,660, and faces a further decline over the coming days if it fails to defend the opening range for October

Pressured by a higher dollar index, weaker crude oil prices and rising US treasury yields, gold remains lackluster and is trading against its traditional safe-haven script amid high inflation and uncertainties worldwide.

The price of gold traded back below the 50-Day SMA (simply moving average) of $1,718 to be on track to test the monthly low of $1,660, and faces a further decline over the coming days if it fails to defend the opening range for October, precious metal analysts said.

As the specter of an aggressively tight monetary policy from the US Federal Reserve continues to hang over the precious metals markets, December gold was last down $25.20 at $1,684.10 and December silver was down $0.40 at $19.86.

According to bullion market analysts, the gold market can get back above $1,700, the uptrend will be achieved, and a run to $1,740 would be possible.

Before this week, gold technicals were very negative, especially following a drop below $1,680. A steeper decline below $1,600 could have opened the door to a more significant selloff down to $1,290, according to DailyFX strategist Michael Boutros.

"The technicals were very gloomy here. If gold prices are able to get above $1,706, we can dispel this downside break," Boutros was quoted as saying by Kitco News.

Analysts said the price move higher needs to happen within the next two weeks. Otherwise, the downward trend will take over. "What happens in the next two weeks in price is paramount. The extraordinary speed and magnitude of Fed rate hikes put heavy pressure on gold," Boutros noted.

“Historically gold has been considered a hedge against inflation, a safe haven during times of uncertainty. But this time the precious metal is trading against the script. Inflation has risen to levels not seen in the past few decades in the US, European countries, and also EMs like India. The central banks across the globe are hiking rates to rein in inflation,” says analysts at Emkay Wealth Management.

They argue that despite the fact that there is high inflation amid economic uncertainties around the globe, gold has been largely trading range-bound. The trading range has been $1630 and $1740 for the past one month. It is currently trading around $1690-1700 per ounce and is widely expected that in the near future it may remain in narrow ranges.

They point out that the only factor which gives some potential for strength to gold at this point in time is the occasional talk of gold as a hedge against inflation and uncertainties. “But this property of gold as an asset class has been undermined to a large extent as evidenced by the fact that despite inflation has been very high in the US, Europe, and other territories, gold has not picked up.”

“The current spell of gold weakness may continue till there is more concrete information on the state of the economy in the major economies, especially against the background of an aggressive central bank trade-off unfavourable to growth and promoting stability,” analysts at Emkay said.

The consensus among precious metal pundits is that geopolitical tensions could be one short-term driver that gets gold above $1,700.

However, it is essential to remember that any geopolitical gains in gold are likely only temporary, said TD Securities global head of commodity strategy Bart Melek.

"Any time there is an increase in geopolitical risk, there is at least a temporary upside," he said. But considering the monetary policy situation, it will be hard to shift gold's overall bearish trend.

Most analysts are of the view that the yellow metal’s near-term direction would largely depend on the employment and inflation data released in the first two weeks of October. They don't see a breakout in gold until they see the employment and inflation numbers. If CPI or employment is stronger than expected, that is a negative for gold. It suggests that the Fed would be more likely to continue hiking as per its 4.6 per cent outline in the dot plot. High inflation would also mean that the market could price in something more aggressive down the road, one analyst said.

— issacjohn@khaleejtimes.com