The term ''strong like a bull'' certainly wasn't for gold bulls of 2016. After witnessing spectacular first seven months with mammoth 30 percent gains and reaching their apex in July’16, gold prices are now witnessing a period of correction.
The term ”strong like a bull” certainly wasn’t for gold bulls of 2016. After witnessing spectacular first seven months with mammoth 30 percent gains and reaching their apex in July’16, gold prices are now witnessing a period of correction. Sentiments have taken a reversal from being bullish to being extremely bearish. A combination of “risk on” trade, faster rate hike expectations, a stronger dollar and outflows from ETFs has stolen the sheen from the yellow metal, pushing it near $1150 an ounce recently – its lowest level since February.
Short-term outlook doesn’t favor gold and some more pressure is visible on prices in the near term as a US rate hike looks almost certain this week. Rising rates are negative for gold prices as they increase the opportunity cost of holding gold. It is widely accepted that a rate hike will hurt gold prices further, turning out to be double whammy after the shocking Trump’s win, which against all beliefs has eroded much of the metal’s gains for the year. Having said that, interpreting how markets eventually react after the Fed meet is a challenging task at the moment.
Nevertheless, even the most dramatic and unexpected events in the past have had little impact on the financial markets in the long run. Going forward, one needs to understand whether buying gold deserves merit at this juncture. Given that the USD is strengthening and ECB has reduced the quantum of QE purchases until December 2017, that is bearish for gold prices, but the technical price structure is remarkably similar to this time last year, before the yellow metal exploded for a 30% rally.
You may also like to watch
Last year, the December FOMC marked the low point for gold prices. It was an epic case of where “selling the rumor and buying the fact” was the optimal trading strategy. This is most likely to be the case again. Every time the Fed hikes, the hurdle for the next hike is higher. Given the relatively stable economic data, US Federal Reserve has not hiked rates in 2016 and has taken a year- long hiatus before they might lift rates this week. Fed started the year with a median forecast of four rate rises, but has since then stood pat. Most likely, Fed will not signal a rapid series of hikes going forward in 2017. Fed’s stance for years has been extremely cautious and data dependent. Even though the US economy has been strengthening and inflation is gradually ticking higher, but excessive dollar strength can be detrimental to the US economy and will put Trump’s domestic manufacturing and export-oriented agenda into jeopardy.
Once the Fed gets the ball rolling, we can expect the yellow metal to witness some more heat, but since a rate hike is already factored in prices, it will lead to value buying opportunity in gold at lower levels. Prevailing trend is currently in a corrective leg, but as the event risk gets over, prices can start to recover from their key support zone around $1120-40 per ounce or Rs.26900-26700 per 10 gms. From this base, they are primed for rally over the coming month or two, being oversold as per all metrics and trading at 10 month lows. So it would be prudent to let all the negatives play out, wait for some more decline in prices from the current levels of around Rs.27500 per 10gms or $1160 per ounce, and accumulate for targets of close to Rs.30500/10gms.
(The author is Sugandha Sachdeva, AVP & Incharge-Metals, Energy & Currency Research, Religare Securities Ltd)