GOLD's Impressive Rally: Safe-Haven Demand and What's Next.

GOLD's Impressive Rally: Safe-Haven Demand and What's Next.

After an impressive 4% surge this week, the price of gold (XAU/USD) has demonstrated resilience, underpinned by escalating geopolitical tensions and a decline in US bond yields. As the coming week lacks significant high-impact economic data releases, the focus will remain on developments in the bond markets, statements from Federal Reserve officials, and ongoing geopolitical issues to gauge the precious metal's future trajectory.

Last week, geopolitical tensions flared when Israel formally declared war and launched a military operation against the Palestinian militant group Hamas, following a significant attack on October 7. As geopolitical uncertainty grew, gold, a traditional safe-haven asset, saw a 1.6% surge on Monday, marking its most substantial single-day gain since May.

US bond markets opened on Tuesday with the 10-year US Treasury bond yield quickly receding from its recent multi-year high near 4.9% to drop below 4.7%. Gold stabilized around $1,860 amid this yield decline.

With expectations of the Federal Reserve keeping its policy rate unchanged for the remainder of 2023, US Treasury bond yields continued to fall, enabling XAU/USD to reach a two-week high above $1,880. Some Fed officials adopted a dovish stance, indicating that additional rate hikes might not be necessary. However, others believed that rates might need to increase further, considering the robust economic activity. The probability of the Fed leaving the policy rate unchanged this year rose above 70%.

In Thursday's report, the US Bureau of Labor Statistics revealed that the Consumer Price Index (CPI) held steady at 3.7% year-on-year in September. Core CPI decreased to 4.1% from 4.3%, while "super core" inflation, which excludes housing costs, recorded a robust monthly increase of 0.6%. These figures briefly boosted US bond yields, but this effect waned quickly. The 10-year US yield turned lower, helping XAU/USD regain momentum beyond $1,880.

Additionally, China reported a trade surplus of $77.71 billion in September, surpassing expectations and August's surplus of $68.36 billion. This data added further support to gold. Geopolitical tensions intensified over the weekend as Israel called for the evacuation of more than a million civilians in Gaza City, pushing gold above $1,900.

Looking ahead to the coming week, the US will release September Retail Sales data, with a projected 0.3% month-on-month increase. Since this data is not adjusted for price changes, it may not have a substantial impact on the market.

On Wednesday, third-quarter Gross Domestic Product (GDP) data from China will be closely watched. The Chinese economy is expected to grow by 4.4% annually after a 6.3% expansion in the second quarter. Disappointing GDP figures could affect gold demand and cause XAU/USD to turn lower.

The Fed enters a blackout period before its November policy meeting on Saturday, October 21. Fed officials are likely to influence markets next week. Continued references to rising yields as a reason to keep the policy rate unchanged could lead to further declines in US T-bond yields, supporting XAU/USD. The 10-year US Treasury yield's key support level is around 4.5%. If it turns into resistance, further yield declines may follow. However, if officials reiterate their data-dependent approach to policy and refrain from ruling out further tightening until they see more evidence of softer inflation, XAU/USD might struggle to gain momentum.

The market will also closely monitor geopolitical developments. Friday's substantial rally in XAU/USD suggests that gold may benefit from further escalations in Middle East tensions.

Technical Outlook: From a technical perspective, gold could reach the 78.60% to 88.60% Fibonacci area before experiencing a retracement. In this area, a pullback to the 50% Fibonacci level is anticipated in the coming week.