By Bhavik Patel
Gold and Silver took some beating after the US Fed updated its monetary policy. The news was what most of the market anticipated but still we saw a crash in precious metals. Fed rate hikes have largely been priced in by the gold market; however the Federal Reserve’s plan to reduce its balance sheet before the end of the year remains a wild card. Gold has drifted back to $1800 and once again $1840 proved to be strong resistance just like it was in the year 2021. Another reason for follow up in selling after the FOMC meet was tremendous growth in GDP Q4 of US (6.9% vs expectation of 5.5%) which pushed US Dollar and Treasury yields higher thus sending gold lower.
The 2-year US Treasury yield is at a 20 month high while the US dollar index is at 1.5 year high. On the inflation front, the PCE price index came in at 6.5% compared to the previous advance of 5.3%. So higher inflation will give some tail wind to gold prices but strong US dollar and yields are capping any upside. On a positive note, inflows into Gold ETF have started. Global holdings of gold ETFs fell by 173t in 2021 in sharp contrast to 2020’s record 874t increase but have started with strong inflows in the first month of 2022. Outside of India and China two biggest buyers of physical gold, there is strong growth in western markets, with demand rising to a 12-year high in the U.S.
Despite negative sentiment, we don’t see major corrections in gold prices. Only if it sustains below $1780 can we take a fresh view. This fall is a good opportunity to accumulate gold as inflation will give tailwinds to gold prices. Historically we have also seen gold appreciating once the US Fed starts its cycle of rate hikes. Currently crypto currencies are also falling which is positive for gold as many investors were diverting their funds to cryptocurrencies against the safety of gold.
Now with strong inflows into Gold’s ETF we can see investors coming back into precious metals. Money managers positions are unchanged from last time so there is no creation of fresh long positions which shows that gold is expected to trade in range next week. Any dips around 47400 in MCX is a good opportunity to go long for a target of 48500. We are neutral to bullish in both gold and silver. Silver can be accumulated around 60000 and we believe if gold and silver recovers, silver will outperform gold as money managers have taken fresh long positions while covering their short positions. So now investors have started dipping their toes into silver after ignoring it for a long time.
(Bhavik Patel is a commodity and currency analyst at Tradebulls Securities. Views expressed are the author’s own. Please consult your financial advisor before investing.)