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Gold finds support – can it hold?

01 October 2021

Friday 1 October 2021

In this week's market report:

  • Gold’s trading range continues to tighten

  • Central banks buy ETFs selling gold

  • Gold in Australian dollars remains steady

  • Inside our office this week

  • Before you go: Why Evergrande isn’t a Lehman Brothers moment

Shae Russell

Shae Russell,
Group Communications Manager

Dear Investor,

US dollar gold price [XAUUSD]
Daily chart

US dollar gold price Daily chart

(Click to enlarge)

Source: Trading View

People want greenbacks: We’re looking at our third rough week for the spot gold price. The US dollar continues to strengthen. The hawkish tone coming from the Federal Reserve Bank is snuffing out any gold rally, and the US markets are largely unconcerned about contagion from Chinese real estate developer Evergrande defaulting.

US debt ceiling temporarily resolved: A temporary solution for the US debt ceiling has been reached and should see the US government through to the first week of December.

  • Earlier this week the Democratic controlled House passed a bill to suspend the US debt ceiling, so the US didn’t default.
  • The bill is unlikely to pass the Republican controlled Senate. Making the debt ceiling a problem for another week.
  • If you’re interested in a deeper run down on what’s to come, CNBC have provided a reasonable account of the political turmoil ahead.  

Gold is out of favour…for now: In spite of the US government getting within a whisker of default, the US dollar is strengthening and crimping any rally in the US dollar gold price.

  • Reuters says: Expectations that the Fed could withdraw economic support kept the [US] dollar index near a one-year high. Spiking US bond yields added to the currency’s firmness.
  • Forbes wrote: The US dollar on Thursday traded at its strongest level in a year against major currencies as traders banked on persistent inflation driving the Federal Reserve closer to its first pandemic-era interest rate rise.

Us dollar may rise further if… The Chinese Evergrande default were to become a liquidity crisis, it’s likely we would see more investors flock to traditional safe haven assets like US Treasury bonds and the US dollar, putting short term pressure on gold prices.

The technical picture for gold is tough: The yellow metal continues to be stuck in a downtrend.

  • Yesterday when gold was lagging at US$1,730, a precious metals expert advised me there was scope for gold to move to US$1,746 per ounce in the short term. Which is exactly what gold did overnight.
  • The move wasn’t strong enough to break gold’s current trend. 
  • For the third consecutive week gold’s trading range has tightened.
 

Gold’s trading range continues to tighten

(Click to enlarge)

Source: Trading View

Bulls, we nudged support: Gold found support. Gold didn’t fall further than US$1,722 per ounce overnight, creating a neat double bottom for the precious metal. Double bottoms are often seen as bullish.

Not enough to keep the bears at bay: The current US dollar strength is keeping a lid on gold prices, and the technical picture is still on the bearish side.

Tonight may change the set up: There is a data dump coming out in the US tonight. Some of the data dets have the potential to influence the direction of gold. While Australia is sleeping, the US will receive news on the following:  

  • Nominal personal income and nominal consumer spending
  • Core inflation
  • Market manufacturing PMI
  • ISM manufacturing Index
  • Construction spending
  • In addition, two Fed branch presidents will be releasing their economic outlook, which may offer insight to further Fed thinking.
 

Evergrande missed an offshore coupon: Last week Evergrande announced there were partial payments made to onshore investors. It comes as little surprise that the Chinese government officials would favour restructuring any internal multibillion dollar coupon payments.  

  • Of note however, is that Evergrande did default on its international coupon payment.
  • It was a minor (in comparison) coupon of US$47.5 million in bond interest.
  • There was no communication that Evergrande wasn’t going to make the payment, further rattling foreign investor sentiment. We have an in-depth review on Evergrande’s potential impact on gold at the end of today’s update.

Did Chinese data cause silver to fall?: Manufacturing in China contracted for the first time since the pandemic started. Electrical shortages are impacting production and slowing economic growth. More than 50% of all silver is used for industrial purposes. This contraction may be contributing to silver’s recent 6% price slide. More below.

Gold in Australian dollars remains steady: For the month of September, gold priced in Australian dollars is reflecting our currencies volatility. Gold in Australian dollars has struggled to break above AU$2,465 this month. The good news is, that any break below AU$2,400 hasn’t been sustained. At the time of writing the Australian dollar gold price has rebounded to AU$2,429 per ounce.

Bears batter the Australian dollar

Worth observing, is the recent battering in the Aussie dollar. Iron ore prices have been heavily sold off in the past few weeks. The Australian dollar is down 3.70% in the past four weeks alone.

Other commodities like natural gas and coal prices are rising but not enough to stem the falls. Bloomberg noted Australian dollar weakness is compounded by the Reserve Bank of Australia (RBA) sticking to both low rates and ongoing stimulus measures.

(Click to enlarge)
Source: Bloomberg

With half of Australia’s population still under a variety of covid restrictions, some analysts suggest there are further downside risks to the Australian dollar. November consumption data (due early December) will be critical. The RBA are forecasting this series will show a ‘bounce back’ for Australian economic data. This particular data set will need to be strong to confirm the RBA’s thesis.

There may be better days ahead for our currency, however, as Bloomberg sees the Australian dollar lifting as lockdown restrictions end. Their analysis suggests the Australian dollar will stabilise around 70-71 US cents, and Credit Agricole project the Aussie dollar will finish 2021 at 75 US cents.

Central banks buy ETFs selling gold

Gold demand by central banks was strong for the first half of 2021, writes the Resources and Energy Quarterly, produced by the Department of Industry, Science, Energy and Resources (emphasis mine):

‘World gold demand decreased by 10% year-on-year to 1,833 tonnes in the first-half of 2021, led by a strong outflow from gold-backed exchange traded funds (ETFs). Over this period, investors pulled out 129 tonnes (worth US$7.5 billion) of gold from gold-backed ETFs. An improvement in the global economy and COVID-19 vaccine roll-out, led to an exodus of institutional investors’ funds from safe haven assets (such as gold ETFs) to riskier assets. Global stock markets continued to reach record highs in the first-half of 2021 attracting investment funds. Offsetting the fall in gold-backed ETFs was a 62% rise year-on-year in official gold buying (that is, from central banks and other government financial institutions) in the first-half of 2021.

Tellingly, even as gold backed exchange traded funds (ETFs) downsized their physical metal position, any excess gold on the market was mopped up by central banks, to strengthen their foreign reserve position.

Central banks appear eager to provide a buffer for themselves against increasing global debt levels as well as rising inflation threats that are beyond their borders.

(Click to enlarge)
Source: Department of Industry, Science, Energy and Resources ​

Short term bumps for silver – fundamentals remain strong

No other precious metal offers the wild ride silver does. Any investor in silver will tell you, investing in the ‘other’ precious metal, is about strapping yourself in, and hanging on. The multiyear silver chart below proves my point.

This week 6% fall for silver— and down a total 12% for the month of September — is emblematic of silver’s wild ride.

Precious metals have been under pressure for several weeks, and this week silver caught the brunt of the selling. Given silver’s utility to industry, it’s highly sensitive to any changes that suggest economic activity is increasing or decreasing. China’s manufacturing contraction is likely to have been a force multiplier on silver during the week.

The current pressure on silver, means any short term price forecast issued at the start of the last month are no longer relevant. We have a rough few weeks ahead.

Those taking a longer term view on the metal however, there are better months coming. Silver is nearing the 50% Fibonacci retracement level. A bounce from here would be extremely bullish. And, as I’ve mentioned before, silver has a bright future.  

US Dollar silver price [XAGUSD]
Daily chart

(Click to enlarge)
Source: Bloomberg; Updata

Inside our office this week

Get in early for Diwali!

Diwali is the festival of lights and it starts in the first week of November.

We are thrilled to be the exclusive Australian distributors of The Royal Mint’s new Henna range, created just to celebrate Diwali. Their new 1g and 5g gold bars arrived last week, and already they are exceedingly popular as people prepare to celebrate this special time of year.

Diwali is traditionally a very busy time at all of our branches, so if you plan on gifting gold this Diwali, place your order early so you don’t miss out.

Before you go…

Before you start your weekend, Nick Frappell provided some in depth analysis on Evergrande’s default and the potential impact on gold for our institutional clients.

Click here to learn what the potential impacts of Evergrande may be.

Until next time,

Shae Russell
Group Communications Manager, 
For ABC Bullion