Gold Reclaims Lost Ground But Not Likely To Win The War With The Dollar

Gold edged up in European session on Tuesday, boosted by rising demand, especially in the world’s two largest consumers of the metal. However, prices have been kept in a range as an increasing probability of a U.S. interest rate hike fueled the U.S. dollar, in which gold is priced.

In China, further weakness in the local currency and investors’ concerns about government’s stringent measures to cool down the property market are seen as a boost for gold demand. The offshore Yuan hit a six-year low against the dollar before partially recovering on Monday. Large state-owned banks had to sell dollars yesterday in an effort to slow a rapid decline in the currency.

However, the Yuan is likely to remain weak as Chinese policy makers have signaled they are willing to allow greater currency flexibility against the backdrop of a slump in exports and a strengthening dollar. Potential Yuan depreciation and restricted investment in the property market may be the main drivers of Chinese gold purchases.

According to figures from the website of Swiss Federal Customs Administration, shipments of gold from Switzerland to China increased to 35.5 metric tons last month from 19.9 tons in August.

In India, seasonal demand is picking up. Dhanteras and Diwali – the country’s most eagerly-awaited festivals – are around the corner. Dhanteras – the first day of the five-day Diwali Festival – falls on October 28th but many Indians have visited the bullion market to buy gold. After Dhanteras and Hindu festival of Diwali this weekend, wedding season will follow. Good rains this year is expected to pushed up rural incomes and in turn boost rural purchases, which make up 60 percent of consumption.

Despite ongoing healthy demand, it will be hard for gold to rally as the greenback has been on a steady rise. Traders are currently pricing in a more than 70% chance of a rate hike at the Fed’s December meeting, following positive economic data and hawkish comments from Fed officials.

Gold is sensitive to moves in the U.S dollar price and U.S rates, as a stronger buck makes gold more expensive to purchasers using other currencies, while higher rates raise the opportunity cost of holding non-yielding assets such as bullion.

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Fig: GOLD D1 technical chart

Gold prices have been kept range-bound for the past week after pulling back from the 38.2% retracement at 1249.79. Gold reversed higher today following three-day losing streak but the upside seems limited. The rally is being threatened by the upper boundary at 1274.50 and the short-term DMA20. As the gold market is still in favour of bears, the metal is expected to retreat once it hits the 1274.50 resistance.

GOLD Trade suggestion

Sell Limit at 1274.50, Take profit at 1260.00, Stop loss at 1280.00

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