By Bhavik Patel
Gold had hit a nine-week low this week but the pace of selling pressure had subsided. Gold’s next major trigger would be US Fed’s chairman Powell’s testimony on 7th March and US employment number on 10th March. For the past couple of trading session, selling pressure in gold prices have slowed down and despite US 10-year Yield hitting 4%, gold has managed to sustain above $1800. Traders need to gear up for higher intraday moves in the lead-up to Powell’s testimony and US employment next week. If we look at the positions in gold, despite the recent short covering and bargain hunting, large traders and some trend-following programs are still short in gold. The market has already discounted a 25 bps rate hike in March and two additional rate hikes of 25 bps. According to the CME’s FedWatch tool, there is a 73.8% probability that the Fed will raise rates by 25 bps and a 26.2% that the Fed will be more aggressive with a 50 bps rate hike. Only a 50 bps rate hike will see gold giving a knee-jerk reaction on the downside.
The present downside for gold is the rally in US Treasury yields both in 2 years (near to 2007 high) and 10 years (above 4%). Although gold prices have ignored the rising yields maintaining the momentum on the upside will be difficult if yields continue to rise. Until the Federal Reserve reverses course and retreats from its tightening agenda, real yields are likely to remain a headwind. In the medium term though, gold will see a respite from selling pressure as the kind of higher move we saw in the dollar in 2022 is unlikely to repeat in 2023. Even hedge funds and money managers who were long at the end of 2022 have become neutral.
The saving grace for gold is the physical tight market likely driven by the significant level of central bank buying we have seen in recent quarters. There is a small backwardation in futures indicating buyers are willing to pay a premium for immediate delivery of physical commodities despite the additional storage and transportation costs associated. Seasonality-wise, from March to July, gold has performed poorly because of a lack of retail physical buying but this doesn’t mean we might not see any rally. We might see gold consolidation in a larger range for the next few months.
In MCX, 55000-54500 continues to be good support while in COMEX, $1800-$1785 is proving to be a good support zone. Next week there are plenty of triggers so we would advise traders not to carry any overleveraged positions and be ready for volatility. Any dips near 55000 could be buying opportunities with a stop loss of 54500 and an expected target of 56200.
(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.)