Gold pulls back as yields, dollar ease

 Zane Aw Yu Xuan

AFTER a brutal selloff in risk assets in September to end off Q3 2022, the US Institute for Supply Management’s Manufacturing Purchasing Managers Index came in at 50.9, lower than the 52.2 consensus last Monday (Oct 3). This led to a pullback in US Treasury yields and the dollar, helping gold welcome Q4 2022 with a ray of hope. The bigger question, however, is whether this is a reprieve from a larger downtrend or the start of a new relief rally.

Investors’ appetite for the dollar as a haven asset in times of economic uncertainty means metals will likely remain under pressure going forward, clouding the demand prospects for gold. While the metal is a traditional haven in times of economic distress, it has slumped this year in the face of the greenback’s relentless gains; the dollar scaled a new two-decade high compared to its major peers, owing to hawkish moves by central banks alongside consistent outflows from exchange-traded funds backed by it.

Gold has been in a downtrend this year, crossing into bear market territory at one point when it traded about 22 per cent lower from the highs of US$2070.42 per ounce in March. The precious metal has since hit a new two-year low of US$1,614.92 per ounce in September, pressured by a surge in US Treasury rates, providing the backdrop for the metal to remain bearish since it does not bear interest and is priced in the US currency. Sentiment for the bullion market remains bearish as Fed officials continued to signal that the US central bank will keep at it with aggressive monetary tightening to rein in rampant inflation, ruling out premature cuts. At the September Federal Open Market Committee meeting, central bankers coalesced with the intention of continuing rate hikes until the funds level hits a terminal rate of 450 to 475 basis points in 2023. Additionally, the “dot plot” which depicts individual participants’ assessments of appropriate monetary policy does not point to rate cuts until 2024. The massive rate increases pose a real headwind for gold as it could bias real yields higher, reinforcing the metal’s weakness, at least in the near term, as opportunity cost increases for those invested in non-yielding instruments.

Institutional holdings in gold-backed exchange-traded funds have also slumped with data from the Commodity Futures Trading Commission showing consistent outflows to levels last seen in 2019.

Looking at the chart for gold, it is perhaps no coincidence that in September, when the Fed ramped up the pace of quantitative tightening while continuing with rate hikes, we saw gold break the neckline support of a double bottom formation at US$1,680/ounce. In the longer term, this has bearish implications as the neckline of the formation is at an area of prior resistance-turned-support, especially when this recent breach of neckline support comes against the backdrop of a larger double top formation. This also highlights some context for continued bearish scenarios, putting focus on the US$1,561/ounce level, the 50 per cent Fibonacci retracement, and perhaps more to the point, an area around US$1,440/ounce. This is confluent with a batch of swing lows from November 2019 to March 2020 that align with the 61.8 per cent Fibonacci retracement of the 2016-2020 major move, using the swing high of US$2,075.47/ounce and swing low of US$1,046.44/ounce as points of reference.

Going back to the question in the beginning, I think much of the world is probably settled on the former rather than the latter given the current developments in foreign exchange and fixed income markets, which continue to undermine precious metals, preventing a major recovery from materialising.

The writer is research analyst at Phillip Securities