Gold trading outlook: futures hold ground after China rate cut, strong dollar weighs

Gold hovered near $1 200 after Chinas central bank unexpectedly cut interest rates for the first time in more than two years on Friday, following up on monetary stimulus measures by the ECB and the Bank of Japan. A firm dollar, however, kept gains checked.

Comex gold for delivery in December traded at $1 194.4 per troy ounce at 8:34 GMT, down 0.28% on the day. Prices ranged between $1 203.8 and $1 193.9 during the day. The precious metal rose 0.57% on Friday to $1 197.7, having hit a three-week intraday high of $1 207.6 during the day.

The Peoples Bank of China lowered its one-year deposit rate by 0.25% to 2.75% on Friday, while the one-year lending rate was cut by 0.4% to 5.6%. This was the first interest rate reduction since July 2012. The central banks bid to jump-start the cooling Chinese economy could be extended with another rate cut, CNBC said, citing sources.

Used as a hedge against inflation, gold draws support from policy makers push to revive a sluggish economy using an accommodative policy.

The Chinese rate cut comes shortly after ECB President Mario Draghi said that the central bank might expand its asset-purchase program to spur inflation, which has been running dangerously low, and added that strong recovery in Europe is unlikely in the coming months. Meanwhile, the Bank of Japan announced a monetary stimulus expansion in October, sending the yen to the lowest in seven years against the dollar.

The ECB has launched a series of measures to ease credit tightness in the single currency bloc in order to spur growth and battle muted inflation, including cutting interest rates to record low and announcing plans to purchase securities.

Data by the US Commodity Futures Trading Commission released on November 21st showed rising bullish sentiment. Hedge funds and money managers boosted net long positions on gold futures and options by 21 634 to 60 307 in the week through November 18th. Long bets rose for the first time in four weeks, while short wagers slid to the lowest in two months.

Fed policy

On the other side of the Atlantic, however, the Federal Reserve is preparing to raise interest rates in 2015 after it wrapped up its Quantitative Easing program at its October 28-29 meeting. Albeit raising caution of inflation still failing to reach a set target, FOMC members expressed optimism about the US economys recovery and emphasized that raising borrowing costs would depend on economic data.

The US dollar index rose to a fresh 4-1/2-year high on Monday, pressuring down gold. The December contract traded 0.05% lower at 88.450 at 8:34 GMT, having earlier risen to 88.510, the highest since June 2010. The US currency gauge surged 0.84% on Friday to 88.405, settling the week almost 1% higher.

The precious metal gained support last week as some central banks increased their bullion holdings. Data by the International Monetary Fund showed that Russia expanded its gold reserves in October by 19.7 tons, while Azerbaijan, Belarus, Kazakhstan and Mauritius also increased their gold reserves. Russia has purchased about 150 tons of gold this year, central bank Governor Elvira Nabiullina said earlier this week.

However, Ukraine slashed its gold holdings to 840 000 ounces in October from 1.3 million a month earlier, compared to 1.36 million ounces at the end of 2013. The country’s foreign currency reserves are shrinking as it battles with pro-Russian rebels in eastern Ukraine, which impaired industrial output and sent the national currency falling.

Weighing on the yellow metal, an opinion poll showed that support for a Swiss referendum to change the Swiss National Bank’s gold policy fell to 38% from 44% in October. Under the proposal, the central bank would be banned from selling its gold reserves and should back at least 20% of its assets with the metal, up from 7.8% in October. If the vote were to be positive, this would drive physical demand for the precious metal, boosting prices up. The vote will be carried out on November 30th.

Assets in the SPDR Gold Trust, the biggest bullion-backed ETF and a major gauge for investor sentiment toward gold, were unchanged for a third day on Friday at 720.91 tons. Holdings in the fund slid to 720.62 tons on November 13, the lowest since September 2008.

Pivot points

According to Binary Tribune’s daily analysis, December gold’s central pivot point on the Comex stands at $1 197.1. If the contract breaks its first resistance level at $1 208.2, next barrier will be at $1 218.6. In case the second key resistance is broken, the precious metal may attempt to advance to $1 229.7.

If the contract manages to breach the S1 level at $1 186.7, it will next see support at $1 175.6. With this second key support broken, movement to the downside may extend to $1 165.2.