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Gold trading reminder: the reduction is imminent and the bulls are afraid, but analysts are still generally bullish on the price of gold

Oct 25, 2021 13:53

On Monday (October 25) Asian time, spot gold was trading around 1794. Last Friday (October 22), the price of gold rose and fell. Earlier, Fed Chairman Powell said that he expects inflation to ease next year and the Fed will begin to reduce its stimulus plan, but the weakness of the dollar and U.S. bond yields still supports gold prices. Close up slightly.

Fundamentals are bullish

[The U.S. dollar index fell slightly]

The U.S. dollar index fell slightly last Friday. After the U.S. dollar index hit a one-year high last week, investors took profits. Worries about inflation will remain high for a longer period of time, prompting investors to advance the time for the Fed to raise interest rates for the first time. Mid 2022.

(Daily chart of the US dollar index)

Now, "There are some positions going out, and we obviously see that the US dollar has strengthened since the Fed meeting in September," said Mazen Issa, senior foreign exchange strategist at TD Securities in New York. This also coincides with the seasonal trend of the US dollar weakening before the end of the month.

The dollar’s rise was also weakened by investors’ expectations of faster interest rate hikes in other currencies.

However, Issa expects the U.S. dollar to regain momentum , as global central banks may respond to aggressive bets on interest rate hikes, while the Fed may maintain a relatively hawkish stance and continue to scale back its bond purchase plans.

[Longer-term bond yields fall]

The yield on the longer-term US Treasury bonds fell last Friday. The yield on the 10-year Treasury note broke through 1.7% last Thursday. The key market indicator for measuring consumer price increases continued to rise due to inflation concerns.

Tom Di Galoma, managing director of Seaport Global Holdings, said that in a few weeks, perhaps even sooner, the 10-year bond yield will test the year's high of 1.776% hit on March 30.

He also said that interest rates are rising worldwide. Due to the tight supply of semiconductor chips in the global automotive industry, the UK 10-year break-even inflation rate reached a 25-year high of 4.29% earlier on Friday.

Fundamentals are bad

[Powell thinks it’s time for code reduction]

Fed Chairman Powell’s concerns about continued high inflation in his latest speech have increased. He made it clear that he will soon begin to reduce the scale of bond purchases, but he will remain patient in raising interest rates.

Powell said at an online event hosted by the Central Bank of South Africa on Friday that “the supply bottleneck may last longer and stimulate inflation. This is obviously a risk now”.

"I want to say that our policy has been fully prepared for a series of possible outcomes," he said. "I do think it is time to reduce the size, but it is too early to raise interest rates."

The Fed is expected to announce the start of the reduction at the end of the policy meeting held from November 2 to 3 . Currently, the Federal Reserve buys $120 billion in U.S. Treasury bonds and mortgage-backed securities every month.

Powell also stated that the risk is that the current inflation rate "will begin to cause commodity prices and wage level makers to expect excessive inflation in the future," which may eventually prompt the Fed to take action. But Powell added that "the most likely scenario is that as the supply bottleneck eases (I believe it will eventually), inflation will fall."

[U.S. service industry recorded the fastest growth in three months in October]

Business activity in the US service industry recorded the largest growth in three months, and the manufacturing sector slowed down due to supply and labor shortages.

IHS Markit announced on Friday that the initial value of the IHS Markit Service Industry Purchasing Managers Index (PMI) rose to 58.2 from 54.9 a month ago. The manufacturing PMI fell to a seven-month low of 59.2. A reading above 50 indicates the expansion of the service industry.

Chris Williamson, chief business economist at IHS Markit, said that “service industry activity recovered in October and the number of new crown cases continued to decline, marking an encouraging and strong start to the economy in the fourth quarter”.

But Williamson said that although manufacturers continue to report strong demand, factory production is still restricted due to record supply chain bottlenecks and labor shortages.

Services account for more than two-thirds of economic activity in the United States, while manufacturing accounts for 12% of economic activity.

This week's trend forecast

The rising threat of inflation has created some clear bullish sentiment in the gold market, despite Fed Chairman Powell’s attempts to downplay these growing concerns.

He pointed out that although supply chain issues may increase the risk of inflationary pressures continuing until 2022; however, he added that his basic assumption is that the supply bottleneck is resolved and the inflation rate rises to 2%.

Before Powell’s comment, analysts were very bullish on gold, and many hoped that the price would test the main resistance level of $1830 per ounce.

Last week, 15 Wall Street analysts participated in the Kitco News gold survey. Among the participants, 13 or 87% believe that the price of gold has risen. At the same time, two analysts or 13% of analysts hold a neutral attitude towards gold in the near future. No analyst is bearish on gold.

At the same time, online polls received a total of 598 votes. Among them, 360 respondents (ie 60%) believe that the price of gold will rise this week. Another 134 or 22% said it was lower, while 104 or 17% of voters were neutral.

Although some analysts are bullish on gold, they believe that the market will not attract major funds until it breaks the resistance of $1,835.

"As the price of gold rises above $1,800, you have to be bullish on gold," Ole Hansen said. "But given the poor performance of gold so far this year, I also reserve the right to be disappointed."

Hansen added that a breakthrough of $1,835 may create enough momentum in the market to push the price back to $2,000 per ounce.

Equiti Capital market analyst David Madden (David Madden) said that Friday's initial rebound in gold pushed prices above the key downtrend of the all-time high set last year. He said that he believes the price of gold will rise to $1,830, but does not expect this level to break through.

He pointed out that the U.S. dollar has been in a strong upward trend since May, which has a significant adverse effect on gold. He added that he does not expect this trend to change anytime soon.

Colin Cieszynski, chief market strategist at SIA Wealth Management, said he is bullish on gold as inflation rises.

He said: "We may see central bank officials start to withdraw their previous'temporary inflation' statements and start to reduce stimulus measures. Although ending the stimulus measures is good for the dollar, it may take several months, so I think gold It can still benefit in the short term."

In general, the recent upward trend in gold prices is relatively obvious, but investors are also worried about the Fed's tightening of monetary policy, which has caused the rise in gold prices to be dragged down, and this week may still continue the upward trend of volatility.

(Spot gold daily chart)

GMT+8 8:46, spot gold was quoted at $1,795.08 per ounce.