By Bhavik Patel
Top headline for this week was Gold breached its psychological level of $1700 and went till $1682 before bouncing back to $1713. Gold was weak throughout the week despite USD showing weakness. Yesterday’s price action was volatile as ECB for the first time in 11 years has increased interest rate by 50 bps and EURO rallied but soon gave up all its gains after it introduced Transmission Protection Instrument (TPI) – a new bond purchase scheme aimed at helping more indebted euro zone countries and preventing financial fragmentation subject to following the EU fiscal compliance.
The US Dollar rebounded but gold still managed to lift its head above $1700 as the EU might be coming into recession. This week gold’s weakness was attributed to fading inflation fears as inflation world wide seems to be peaking out looking at falling commodity and energy prices. That would be the reason why gold struggled this week despite USD not gaining. Hedge funds became negative for the first time in 3 years as speculators have added short positions and covered long positions. This shows a shift in sentiment but we believe the sentiment can change if gold manages to break above $1786. However fundamentals still point to weak gold prices as next week we have the US Fed FOMC meet. Fed’s guidance for future rate hikes will determine the path of USD and gold prices. If the US Fed becomes dovish, we may see gold prices rallying.
Technical chart still points to a bearish trend as gold is making lower high and lower low price action. Prices are also trading below its 20 and 50-day moving average. Gold had taken support at its 200-day moving average of 49700 and that would be the immediate support. We don’t expect any significant bounce back as gold has headwinds in the form of next week’s US FOMC meet.
Gold is near its exhaustion level near $1686-$1680. We have seen this week, twice, gold touching around those levels and bouncing from it. However if prices fall below $1670, then the next exhaustion level comes around $1568-$1558. Further shorting of gold is not feasible looking at risk/reward ratio. Investors should look at taking a more conservative trading approach and buying near gold’s exhaustion level around $1686-$1680. In MCX, that level comes around 49500-49000. Build some position around that level and take some profits on a rally to resistance points around 50500-51000.
(Bhavik Patel, Commodity & Currency analyst, Tradebulls Securities. Views expressed are the author’s own.)