By Bhavik Patel
Gold market is expected to witness short term turbulence as the long side is getting overcrowded. Usually when everyone is bullish, there are high chances of correction. Right now investors are too optimistic, thinking the US Fed will start lowering interest rates by the end of the year. Dovish comments from the Fed also pushed prices higher. Despite short term turbulence, we still remain bullish on the market as rising interest rates will create a worse environment for equity markets.
Gold’s performance last year was actually very respectable and this year, we will see gold rise above $2000. The biggest hurdle for gold is now out of the equation, which are a strong USD and Treasury yields due to rising rates by the Fed. Not only is the Federal Reserve’s monetary policy unlikely to provide new momentum for the U.S. dollar, but rising interest rates increase the risk that the U.S. falls into a recession. Historically, gold has proven to be strong against recession and inflation. Gold is in a sweet spot and a goldilocks environment for 2023. If the Fed does end its tightening cycle early, that will create further weakness in the U.S. dollar. Gold is poised to be the best asset in 2023.
Another factor which supports gold’s rally is buying from central banks. Last year central banks purchased 1,136 tonnes of gold, the second-highest amount since 1955. We expect central banks will continue to purchase gold for the foreseeable future, even if it’s not at the record levels seen last year.
In MCX, gold has seen a one way rally from 50,000 to 58,847. Since mid-December, prices have not touched its 20-day moving average. Market continues to trade in the overbought zone as RSI_14 is trading at 76. Historically, there are higher chances of correction whenever gold sustains in an overbought zone for higher periodic time. We believe a correction is near and investors should wait at least till levels of 56,800-56,500 before taking any fresh long entry. Today’s US Non-farm payroll data will also add volatility so caution is required.
This is not the market for taking short positions so avoid taking any counter bet but wait for correction before going long. The more the market will be in an overbought zone, the higher chances of correction as well as spike in volatility. So avoid taking any leveraged position as the market is already trading at all-time high in MCX.
(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.)