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The net long non-commercial futures on gold increased more than 20'000 contracts on week to October 14th. The rebound from $1,180 support has clearly been a trigger for short-term correction. In addition the speculators seemingly rely on lower US yields and higher physical demand to increase long gold positions in their portfolios.The extension of USD weakness and lower US yields should continue supporting the short-term bullish trend. The 40-day rolling correlation between XAU and US 10-year yields exceeds 50%, which is a strong sign of risk-off environment. The US-10 years pay no more than 2.17% given the uncertainties on the timing of the first Fed fund rate hike. In this configuration, we see deeper upside correction in gold prices, mostly due to safe haven inflows. In addition to safety, Chinese and Indian festive periods should keep the physical demand prominent in the coming months.XAU/USD test $1,245/1,251. Given the strengthening bullish momentum, a breakout should open the path towards $1,283/$1,300 (Fib 61.8% on Jul-Oct sell-off / psychological level). The SPDR gold holdings remains at five year lows, while the GLD (SPDR gold shares, world largest gold ETF) nears $200 for the first time since September 10th.Soft US inflation is positive for goldToday, the US releases the September CPI figures and the expectations are soft. The headline CPI y/y is expected to slow down to 1.6% from 1.7% y/y a month ago; the core CPI should remain stable at 1.7% y/y. The moderate improvement in wage growth combined to higher US household savings will perhaps keep the consumer prices subdued for some more time. The PCE y/y – closely monitored by Fed – printed 1.5% in August. The next release is due on October 31st and will perhaps remain quite far from Fed’s 2.0% target. Soft price pressures offer a net flexibility to Fed on the timing of the first FF rate hike. Therefore, the downside pressures in US 10-years should continue, giving the expected support to gold markets.
