By Bhavik Patel
The outlook for gold remains weak in the short term. Gold has been on the backfoot since 9th August when the US dollar started climbing from 102. Right now the US dollar is at a two month peak while the 10 year US Treasury yield hit its highest since October. A similar trend can be seen in the longer-term 30-year Treasury Bonds which rose 5.2 basis points. Current yields have risen to 4.411%. The 30-year bond is at its highest level since April 2011.
The statements made in the minutes from the July FOMC meeting, suggested that the Federal Reserve will probably continue to have a restrictive monetary policy and likely include an additional rate hike of 25 basis points this year, which is the main reason for the sharp increase in longer-term US debt instruments. Data from the US all point to a strong economy as after muted CPI, strong retail sales have rattled the gold markets. The strong retail sales number raised expectations for the Federal Reserve to consider another rate hike in September to quell inflationary pressure from extraordinary spending.
Consumer spending accounts for at least 70% of the US economy, with Americans’ purchase of food, fuel, and merchandise being among the key things that add to inflation, aside from their wages. After muted CPI and retail sales data, there was release of FOMC minutes which again reiterated Fed’s focus to fight inflation by raising one more rate hike. This was two back to back punches to gold which helped bears in pushing price below its support of $1900 without any resistance.
The Fed’s next decision on rates is on Sept. 20. At the moment, there is less chance of a rate hike on Sept 20. Investors bet on a 37% chance of another hike in 2023, and a 58% chance the Fed leaves rates unchanged for the rest of 2023, according to the CME FedWatch tool. Markets are looking for cracks in the U.S. labor market to really change the current trajectory and until such time, the gold rate may remain under pressure.
Technical Outlook
Gold price in MCX had made bearish candlestick patterns on a daily scale. It is languishing at 1 month low in MCX while 5 month low in COMEX. The strength in MCX is due to the weak rupee which is trading at all-time low. We expect the weakness to continue till 58,000 so any rise near 58,800-59,000 should be used as an opportunity to go short with stoploss of 59,400 and target of 58,000.
(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.)