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03 October 2023

IMF move helps gold break downtrend

By Ole Hansen

The US Federal Reserve began withdrawing emergency support to the financial system by raising the discount rate.

Although the move was not seen as one leading up to an imminent change in the Fed funds rate, stock markets fell and the dollar strengthened on the back of the announcement. The Fed stressed that the changes did not signal any change in the outlook for the economy but nevertheless this changes the psychology of the market.

Gold had a very interesting week with the announcement from the IMF that the remaining 190 tonnes of a total 400 tonnes was going to be sold into the open market instead of through direct sale to Central Banks.

Last September, they announced the sale which was going to fund projects among poorer nations. India bought 200 tonnes at around $1,050 followed by smaller amounts by Sri Lanka and Mauritius.

The fact that the remaining 190 tonnes did not attract a buyer despite constant rumours about Russian or Chinese interest has fuelled a lot of speculation over past few months.

The news about the sale initially led to a 2.5 per cent sell off but the $1,100 level proved to be well supported and a bounce followed. Given the high degree of publicity surrounding this type of sale where both quantity and price would be public information probably kept some interested buyers away.

China has already indicated that they want to diversify their reserves further and buying gold would be part of that process. A process that has seen them doubling their reserves in the past six years to more than 1,054 tonnes and recently they have been buying into the SPDR Gold ETF.

Selling the remaining gold in the open market can prove an easier task and central banks who has been watching from the sideline may now quietly get involved. The IMF has promised not to disrupt the market saying that sales would be done gradually.

Despite the recent dollar strength on the back of sovereign debt problems in Europe, with widening budget deficits in Greece, Spain and Portugal hampering Europe's economic recovery, gold prices have held up. Measured in euros, it raced to a new all time high this week at €828 and indicates a potential decoupling with gold and dollar being able to rise together.

Technically, gold broke the downtrend from the December high reaching $ 1,127 before the IMF story took it back down to support at $ 1,098. The speculative long position on Comex has been reduced back to September levels leaving the market in a more neutral situation. A break higher would target $1,162 while support below $1,098 can be found at $1,070 before $1,045.

Crude oil rallied strongly this week on the back of further signs of economic growth which led to a technical move back above $72.50 reaching $79.30 before the Fed hike triggered some profit taking. The speculative long position on the WTI futures contract has been reduced by 68 per cent over the past few weeks leaving the market in a better position to react to positive news.

The near-month futures contract is poised to close above its 200 week moving average at $76.20 this week. This is only the second time since October 2008 this has happened and a technical reaction to the upside could be expected. A move through resistance at $80 would target $85 while support can be found at $75 followed by $69.50.

Natural gas fell on a continued large overhang of supplies. The seasonal drop through the winter month has despite cold weather left the supply nearly three per cent higher than the five year average. The winter is now more than half over and it leaves prices exposed to the downside as spring approaches. Support at $5.06 is currently the only level holding the market from a deeper retracement potentially down towards $4.74.

Copper has recovered very strongly from the lows seen a couple of weeks ago and was getting close to challenging the January high at $355.

Despite London Metal Exchange Copper stocks increasing to the highest level since October 2003 the recent behaviour of traders holding copper in LME designated warehouses could indicate that demand for the physical metal is picking up.

This can be seen through the increased number of cancelled warrants at the LME, something that indicates metal is getting ready for delivery out of storage.

Technically, we are looking for a pull back towards support at $ 315 on the future for May delivery given the 18 per cent rally over the past couple of weeks. Resistance can be found at $335 and $347.

- The author is Senior Manager for CFD and Listed Products with Saxo Bank. The views expressed are his own


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