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Gold prices hit 2-1/2-month low, may trade at Rs 49200-51600 this week; investors must wait for long positions

Gold hit a 2 and half month low this week as bulls were punished by the strong US dollar and rising bond yields.

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We believe gold is expected to struggle in the near term because of the rising US dollar

By Bhavik Patel

Gold hit a 2 and half month low this week as bulls were punished by the strong US dollar and rising bond yields. The Federal Reserve is on the cusp of embarking on its most aggressive tightening cycle in 28 years with a 50bp rate hike today. The 10-year yield early this week hit a 3.5-year high just above 3%. The yield on the benchmark German 10-year bond (bund) rose above 1% for the first time since 2015. The Federal Reserve has been forced to shift its stance as inflation pressure rises out of control, being driven by elevated food and energy costs. They have been so behind the curve that now they are catching up. Right now because of rate hike, investors are liquidating bullish bets. Historically gold has marked a long-term low at the start of the U.S. central bank’s tightening cycle. The threat of an economic slowdown increased sharply last week after U.S. GDP data showed that the economy contracted 1.4% in the first quarter of 2022, significantly missing expectations. This also puts the Fed into a corner as they cannot aggressively hike rates otherwise they would derail the economy. 

Surprisingly, gold has not usually reacted to real interest rates or risk on/risk off sentiment in the stock market. Gold has largely reacted to the US dollar only in last six months; any movement of gold is offset by movement in US dollar and yields. Gold has ignored all other variables and has moved opposite of the US dollar’s price action. Gold investors just need to get past Wednesday’s FOMC meeting to find some new momentum. Money managers have lowered their long positions by 19345 contracts while short positions rose by 804 contracts. Gold’s net length now stands at 81,117 contracts, down nearly 20% from the previous week. Gold’s net length is currently at a three-month low. Last week Gold’s ETF saw outflows ending 14 week winning streak. 

We believe gold is expected to struggle in the near term because of the rising US dollar. Gold investors need to have patience because we are not going to see a V shaped recovery but very fragile recovery. Momentum for gold has shifted from neutral to bearish because of aggressive Fed stance and next support for Gold in COMEX comes at $1822. Gold needs to breach above $1925 for momentum to shift from bearish to bullish. In MCX, support for gold comes at 50200 and 49600 while resistance is at 52100. Bears have the upper hand and we expect this week gold will remain under pressure. Range for this week would be 49200-51600 with bias on the lower side. We recommend investors to wait for any long positions and for those investors looking for long term positions, they can start accumulating around 49200 levels.

(Bhavik Patel is a commodity and currency analyst at Tradebulls Securities. Views expressed are the author’s own. Please consult your financial advisor before investing.)

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