By Bhavik Patel
Gold and Silver prices saw sharp run up this week on back of safe-haven demand. Fears of a global financial crisis are increasing after the sharp fall of Credit Suisse bank. The banking turmoil started last week in the US which was the biggest bank failure since the 2008 Great Financial Crisis. It revealed just how fragile financial markets are. Over the weekend, the US Treasury managed to put out a fire by reassuring investors that their deposits are covered by them, however they will not bail out banks.
However at the start of this week, Credit Suisse’s shares hit all-time low and many of the European banks shed more than 10% of value prompting halt in trading. The selloff came a day after the Swiss bank said in its annual report that it lost roughly $8 billion last year. This panic caused the Dollar index to shoot up from 103.60 to 104.60 in a matter of hours and Gold in COMEX also shot from $1900 to $1930. It is very rare to see both US dollar index and Gold to gain side by side. Usually they move in opposite directions as COMEX gold is traded in USD.
Another factor pushing both gold and silver prices higher was anticipation that the US Fed may not increase the interest rate by 50 bps but may opt for 25 bps or no rate hike looking at the condition of US banks. The ultimate mandate of the Federal Reserve is not inflation or employment, it’s financial stability. The US Fed can’t continue to hike rates now that cracks have begun to widen. The US Fed may increase rate one time to keep its credibility but any more rate hikes have gone out in the wind. There are talks to rate cut from June while inflation is expected to remain high. This would lower real rates which will be beneficial for gold. So in this environment, it is logical for gold to go higher although in the very near term, we might see some profit booking after a sharp up-move.
In MCX, gold is near to all time high and is very near to its overbought zone as RSI_14 is at 68. In near term, we expect some profit booking to take place as financial turmoil comes in waves where after one panic, sanity sets in and then after that fresh batch of bad news come. So at present we are in that situation where sanity will soon prevail as central banks are stepping in which is why some profit booking might take place and gold will wait for another shock to come into the system to push its price up. Currently, we recommend traders to book profit if they have a long position and wait for correction before initiating any new position. In COMEX, only below $1880 may we see trend reversal and in MCX, next support for gold is at 57,000.
(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.)
