Gold trading outlook: futures head for second weekly gain on Fed view, China fears

Gold hit a 1-1/2-month high on Friday and headed for a second weekly gain on speculation the Federal Reserve might delay an interest rate hike for later this year, while downbeat data from China fanned fears of a deepening economic slowdown, spurring demand for safe haven assets.

Gold futures for delivery in December traded 0.43% higher at $1 158.2 per troy ounce at 06:50 GMT, having earlier risen to $1 167.9, the highest since July 9th. The contract surged 2.2% on Thursday to $1 153.2, the most prominent close since July 14th, and is up 4.1% for the week so far.

Gold extended its rally, trimming a year-to-date decline to about 1.2%, after minutes from the FOMC’s July meeting showed policy makers needed more proof that the labor market is healing and that inflation is moving toward the targeted level in order to increase borrowing costs. Fed officials were concerned that low inflation and a weak global economy posed a sizable risk for the US economy.

A report by the Labor Department showed on Wednesday that the cost of living in the US in July rose at the weakest pace in three months, making it more likely for the Federal Reserve to initiate its first interest rate hike in almost a decade in December, rather in September. Such speculations tend to boost the precious metals investment appeal because investors usually avoid it during times of higher interest rates as it pays returns only through price gains, while holders of assets such as bonds benefit from the higher borrowing costs.

The US dollar index contract for settlement in September traded 0.55% lower at 95.475 at 06:50 GMT, having earlier fallen to 95.385, the lowest since June 30th. The gauge slid 0.4% on Thursday and is down 1.1% for the week.

Still, strong data from the US housing sector this week have supported broad expectations for a hike this year. A gauge of homebuilder sentiment hit on Monday the strongest in almost a decade in August, while a report on Tuesday pinned US new home construction in July at the highest in almost eight years. Data on Thursday showed that US home resales soared to an 8-1/2-year high last month, while manufacturing activity in Philadelphia continued to expand in August.

China slowdown

However, persisting concerns over a continued slowdown in Chinas economic activity kept a solid ground under the precious metal after last weeks devaluation of the nations currency shocked the markets.

“The current strength is a combination of the recent bearish data out of China, including the recent currency devaluation, heightening concerns of greater economic issues, and more immediately the fading chances of a Fed lift-off for September” said for Bloomberg Mark Keenan, head of commodities research for Asia at Societe Generale SA in Singapore.

Although fears of a currency war subsided after the Peoples Bank of China verbally supported the yuan late last week, a preliminary private report showing Chinese manufacturing activity contracted at the fastest pace in almost 6-1/2 years in August added to fears of a worsening economic situation in China, boosting demand for safe haven assets.

The preliminary manufacturing Purchasing Managers’ Index prepared by Caixin Media and Markit Economics slid to a 77-month low of 47.1 in August, worse than a projected drop to 47.7 from 47.8 in July, as both domestic and export demand decreased at a faster pace. The flash China General Manufacturing Output Index came in at a 45-month low of 46.6 from 47.1 in July.

Assets in the SPDR Gold Trust, the biggest bullion-backed ETF, rose on Thursday by 3.57 tons to 675.44 tons after remaining unchanged for five days. Holdings in the fund have shrunk by little over 50% since peaking at at 1353.35 tons in December 2012.

Pivot points

According to Binary Tribune’s daily analysis, December gold’s central pivot point on the Comex stands at $1 146.3. If the contract breaks its first resistance level at $1 160.6, next barrier will be at $1 167.9. In case the second key resistance is broken, the precious metal may attempt to advance to $1 182.2.

If the contract manages to breach the S1 level at $1 139.0, it will next see support at $1 124.7. With this second key support broken, movement to the downside may extend to $1 117.4.

In weekly terms, the central pivot point is at $1 109.3. The three key resistance levels are as follows: R1 – $1 129.7, R2 – $1 146.6, R3 – $1 167.0. The three key support levels are: S1 – $1 092.4, S2 – $1 072.0, S3 – $1 055.1.