By Bhavik Patel
The rebound in gold after Tuesday’s strong CPI print is probably brief because the uptrend is still in place and traders are willing to view pullbacks as opportunities to buy. Investors in gold were hesitant to buy at the beginning of this week, despite the metal’s impressive 4.6% advance to new all-time highs last week.
The U.S. CPI report for February released on Tuesday revealed headline and core inflation to be higher than anticipated, which was predicted to contribute an upward dollar rally and a sell-off in government bonds at the same time.
Even if gold prices were to slide further in the near term, this wouldn’t necessarily be a sign that the metal has topped. Actually, a lot of investors who passed up the chance to purchase gold during its recent surge will be waiting to take advantage of any short-term decline.
The robust CPI data was swiftly dismissed by the equities markets, and investors in precious metals are probably going to follow suit. If there isn’t a lot of technical damage, there’s a chance that gold and silver will make a comeback later next week. With the market remaining confident of a rate cut in June, despite a slightly stronger CPI report, gold’s weakness should be short-lived.
The FedWatch tool from the CME is now projecting a 65% chance, down from a recent 70% probability, that the Federal Reserve will start the first rate cut in June. This demonstrates that market players are once more upbeat about this year’s rate decreases.
If the Fed doesn’t cut rates in the first half of this year, they only really have three meetings during the rest of the year to deliver on those three cuts. After the June 12 meeting, the Federal Reserve will make its next monetary policy decision on July 31 and the following one on September 18.
The July meeting would be too close to the central bank’s Jackson Hole retreat, and the September meeting is too close to the November election.
So in any case, if US Fed as stated earlier that they would be looking to cut atleast 3 times rates this year, have to start from June.
We recommend investors not to chase prices at such high levels as gold is in overbought state. The momentum oscillator is around 72 and historically we have seen correction from such overbought state. Second is if we look at hedge funds positions, it also shows overcrowding on long side.
There is build up of froth in gold as long positions is highest on record in COMEX and net long is second highest on record. So wait for correction around 64500-64300 and then one can go long with expected upside target of 6600 and stoploss of 63800. We might see some profit booking and volatility ahead of next US Fed meeting on 20th March.
(Bhavik Patel is a commodity and currency analyst at Tradebull Securities. Views expressed are the author’s own. Please consult your financial advisor before investing.)
