Gold trading outlook: futures hold near 3-1/2-week high on currency fears

Gold fell in early European trading on Thursday as the US dollar firmed and a report showed that global demand for the precious metal fell to a six-year low in the second quarter. Prices, however, held near a three-week high amid speculations a weaker yuan may impact the Federal Reserves monetary actions.

Gold futures for delivery in December traded 0.21% lower at $1 121.2 at 06:54 GMT, having earlier risen to $1 126.3, the highest since July 20th. The precious metal rose 1.4% on Wednesday, a fifth straight daily gain.

Gold has recovered more than 4% since slumping to a 5-1/2-year low in July as fears of a currency war that could potentially be sparked by Beijings devaluation of the yuan prompted investors to seek safe haven. The move also spurred speculations among some that the Federal Reserves course of action may be affected by the dropping Chinese currency. And although the Fed is unlikely to delay the initial hike for the next year, a much weaker yuan could force the central bank to adopt an even more gradual tightening policy for the subsequent increases.

The yuan fell for a third day on Thursday against the US dollar, although the Peoples Bank of China said there is no basis for further depreciation given the strong underlying economic fundamentals. Still, according to Reuters, there has been support within the Chinese government for a devaluation of up to 10% to bolster exports, a move that could trigger competitive devaluations, effectively a currency war, that would bolster safe haven demand for the metal.

Reflecting the run-up to safety, assets in the SPDR Gold Trust, the biggest bullion-backed ETF, rebounded on Wednesday from the lowest since September 2008, rising by 4.18 tons to 671.87 tons, the first increase since July 13th. Holdings in the fund have shrunk by little over 50% since peaking at 1353.35 tons in December 2012.

Demand at six-year low

Despite the temporary support, however, the precious metal remains pressured by the long-term prospects of higher US interest rates, extending losses into a third year. Making the negative tendency even more evident, a report by the World Gold Council showed that global gold demand tumbled to the lowest in six years in the second quarter after top two consumers China and India purchased less gold jewelry as incomes at both countries were separately hit.

Overall demand was 12% lower compared to the same quarter a year earlier, amounting to 914.9 metric tons. Chinese purchases contracted 3% as cooling economic growth and heavy fluctuations in the domestic stock market curbed appetite, while India saw purchases drop by a quarter as unfavorable weather conditions hit rural incomes.

Global jewelry demand, the biggest source of demand for gold, fell 14% to 513.5 tons from a year earlier, with that of China declining 5% to 174 tons and Indias dropping by 23% to 118 tons. Global investment demand slid 11% to 178.5 tons.

Still, central banks remained net buyers for an 18th straight quarter, boosting purchases by 11% to 137.4 tons from the previous quarter, although down 13% year-on-year, and Chinese and Indian demand is expected to pick up in the second half.

Pivot points

According to Binary Tribune’s daily analysis, December gold’s central pivot point on the Comex stands at $1 116.7. If the contract breaks its first resistance level at $1 132.4, next barrier will be at $1 141.1. In case the second key resistance is broken, the precious metal may attempt to advance to $1 156.8.

If the contract manages to breach the S1 level at $1 108.0, it will next see support at $1 092.3. With this second key support broken, movement to the downside may extend to $1 083.6.

In weekly terms, the central pivot point is at $1 091.1. The three key resistance levels are as follows: R1 – $1 101.9, R2 – $1 109.8, R3 – $1 120.6. The three key support levels are: S1 – $1 083.2, S2 – $1 072.4, S3 – $1 064.5.