Despite a strong US dollar and high yields, the precious metal has remained resilient
GOLD remained under pressure as the US dollar strengthened throughout September, but the recent price action has left me cautiously bullish on the precious metal.
Recent US data has started to soften. August headline personal consumption expenditures inflation rose 3.4 per cent year on year, below the expected 3.7 per cent, while September non-farm payrolls increased by only 29,000 against expectations of 90,000.
Together, the data sharply reduced expectations of another US Federal Reserve rate hike in October.
Yet, the main headwinds for gold have not disappeared. Markets still price around an 80 per cent chance of another hike in December, while the US dollar index was around 102.23 on Thursday (Oct 8), close to an 18-month high.
The 10-year Treasury yield reached 5.34 per cent, its highest level since 2002.
That makes gold’s resilience more noteworthy. Despite this combination of a strong US dollar and exceptionally high yields, the yellow metal has continued to find buyers around the low-US$4,100-an-ounce region rather than extending September’s sell-off.
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Investment flows tell a similar story. Global gold exchange-traded funds attracted US$10 billion in September, taking third-quarter inflows to a record US$31 billion.
Holdings rose by 67 tonnes to a record 4,256 tonnes even as gold prices fell. The World Gold Council also observed that, for some investors, rising yields may reflect fiscal stress rather than stronger growth.
Technically, this leaves the spot gold price, or XAUUSD, range of US$4,111 to US$4,226 as the first area to watch. If this support holds, I see scope for gold to recover towards US$4,334 to US$4,403 an ounce.
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A sustained break above that region would strengthen the recovery case and bring the August resistance around US$4,648 to US$4,773 back into view.
A retest of the deeper US$4,046 to US$3,887 support zone would not necessarily invalidate the bullish view, as this area has attracted demand several times before.
A sustained break below US$3,887, however, would change the picture and expose the US$3,718 to US$3,791 region.
The greenback may provide the clearest confirmation.
The US dollar index is testing resistance around 102.2 to 103.4. Further gains would remain a headwind, but extending the rally may become harder if Treasury yields struggle to move much beyond current extremes.
A Reuters poll suggested the 10-year yield could ease to 5 per cent by year-end.
For now, the balance of risks still favours a gold recovery rather than a sustained breakdown, provided the broader support structure remains intact.
The writer is a strategist at Phillip Nova