Gold Outlook: Investors should avoid large positions, wait for trend to emerge next week

Gold has a history of performing well once the Fed commences a rate hike cycle and silver follows gold. We might see gold bottoming out around May-June next year and start rallying.

gold, silver, bullion
he higher US inflation is still a supporting factor for gold and silver bulls. (Image: REUTERS)

By Bhavik Patel

2021 is about to end and if we look at Gold and Silver’s performance, it has nothing worthwhile to write about compare to other assets like equity, metals or energy. We’ve seen more money pour into equity strategies this year than pretty much the last 20 years combined. That’s held gold and silver back. US dollar index climbed around 8% this year which is precious metal’s natural headwind. Real yields also rose this year as market-adjusted inflation number and US Fed’s expectation of raising interest rates. All these factors kept from gold and silver shining in 2021. 

Going forward, the Federal Reserve’s more aggressive tapering and the potential of three rate hikes in 2022 have already been largely priced in. This means that any new fear could change the outlook and benefit gold.  Even though the initial reaction to the Fed tapering and higher interest rates might be negative for gold, once processed, it could trigger another rally. 

Gold has a history of performing well once the Fed commences a rate hike cycle and silver follows gold. We might see gold bottoming out around May-June next year and start rallying. Gold market witnessed many fake breakouts this year. It breaks out and rallies, but then the move fades quickly. I can’t get too excited about gold until we hit $1,835 or maybe even above $1,850. Gold would move above $1,800 till $1,820 and then would fizzle out and trade below $1,790. We are into the season where physical demand for gold increases and from a seasonal perspective, demand for physical gold is a big aid in driving prices higher from mid-December to Valentine’s Day.

Chinese’s New Year also comes in Feb and 6 weeks prior to that, we see demand for physical gold increase.  In the next 6-8 weeks, gold and silver could see some boost from physical demand. Silver had been disappointing this year, fluctuating merely in gold’s slipstream. From March’s high when Reddit traders pushed silver above $30, it has been slipping every month since then.  On balance, it suffered disproportionately high losses as compared with gold. As a result, the gold/silver ratio has climbed from a good 70 at the beginning of the year to over 80 now. The gold-silver ratio now is a lot healthier. It’s basically at 80:1. It’s nowhere near the extreme that we saw in March 2020. Anytime the ratio has been 80:1, silver began to look relatively cheap. It will be a fairly quiet data week because of the holidays. Some releases to keep a close eye on next week include Tuesday’s CB consumer confidence, Wednesday’s pending home sales, and Thursday’s jobless claims. Any confirmed trend will emerge next week so we recommend investors not to take any large position due to low volume and participation and trade intraday only.

(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.)

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