Commodities Watch: Bullish bias to remain for gold prices

Round-up

The past week has seen stellar gains in the commodities space, with weather conditions generally a huge catalyst in prompting concerns over supplies disruption, coupled with a weaker US dollar. Sugar prices have topped the performance table with a 17.2% surge, currently trading at its highest level since February this year. We have written about sugar prices previously, you can read more about it here: https://www.ig.com/sg/news-and-trade-ideas/commodities-watch--time-for-a-sugar-rush--240828.

Brent Crude prices also found room to recover over the past week with a 4.0% gain, but this follows after a touch of an almost three-year low. Gold and silver prices were up more than 1%, while platinum prices struggled with a 2.3% dip into the red.

Spot Gold: Bullish-bias to remain

Gold prices have extended its gains into record-high territory this week, trading above the US$2,600 level for the first time, as market participants seek comfort with the Federal Reserve (Fed)’s policy pivot. We remain bullish-bias on gold prices for the following reasons.

1. Despite an outsized 50 basis point (bp) cut this month, the Fed has opted for a more conservative rate path ahead (4.4% Fed rate by year-end). The likely scenario based on their projection will be a 25 bp cut in November, followed by a 25 bp cut in December. We believe while this is the ideal based on current economic resilience, that may also leave room for surprises. Any dovish deviation from their projections, where the Fed may have to consider another 50 bp cut ahead, could be a boost for gold prices.

2. Gold prices offer a good hedge against potential uncertainties ahead, namely on the geopolitical front (Middle East, Ukraine-Russia, US-China ties) and in the lead-up to the US election. Polls are leaning towards a Harris win currently, but margin remains tight (+2.2%). Not to mention that the outcome of the US presidential election is not decided by a popular vote, which may drive near-term flows to gold on any shocks.

3. On the technical front, the US 10-year Treasury yields have broken below a head-and-shoulder neckline in August this year. Projections based on the formation suggests further downside to the 3.0% level from current 3.74%, with lower bond yields likely to increase the attractiveness of gold as a non-yielding asset.

4. SPDR Gold Trust Exchange Traded Fund (ETF) holdings have been increasing since late-June 2024, but remains far off from its extremes. Improved ETF buying may help to support gold prices’ upside.

Strategy: A broader upward trend may leave buying-on-dips as the preferred plan of action. Some resistance may be expected at the US$2,685 level in the near term, given that it marked the price target from an upward breakout of a consolidation pattern back in August this year. Its daily relative strength index (RSI) is also currently trading at near-term overbought levels. A retest of the US$2,685 resistance, followed by a retracement to the US$2,600 (23.6% Fibonacci level), may potentially offer a buy opportunity. Otherwise, a move in its daily RSI back towards its mid-line may also offer a good reset for some loading up in long positions as well.