By Bhavik Patel
Gold price is once again at the door around $1900 trading at a seven month high. Yesterday, after inflation data, it managed to put its foot above the psychological level but once again failed to see any follow-up move. Whether or not the metal can maintain gains depends on the rate hike expectations for the Federal Reserve’s February meeting. The rally which started from November was on the back of short covering, and the main driver behind the bullish trend has been the macro outlook including cooling inflation, anticipated dovish response by Fed, and slowing economy.
Now, to breach and sustain above $1900, traders need to see inflation start to meaningfully come down and Fed commit to stopping their rate hike. Now, market is leaning towards 25 bps instead of 50 bps post US CPI data. according to the CME FedWatch TooL, following the CPI report, the market began to price in a 96.2% chance of a 25 basis point increase in February versus the 50 bps hike. Markets though are not anticipating any halt in rate hikes but the pace will be slow. The era of a 75bps rate hike is over and moving forward, it would be 25bps now.
With inflation slowing rapidly and recession looking inevitable, the second half will witness meaningful rate cuts which will be beneficial for gold prices. The 3-month to the 10-year became inverted not long ago and the yield curve is showing recession coming. Both manufacturing and service sector ISMs is in contraction territory. The Fed will have trouble getting rates up to 5% and will be forced to cut this year.
In MCX, gold is trading near all-time high but momentum oscillator is showing signs of divergence. RSI_14 is not yet at overbought zone but any peak in price is not matched by the peak in RSI indicating some caution is needed. The main trigger for this month was US CPI which came in line with estimation but we have not seen any big move in gold indicating fresh investment has not come in and participants have marginally opted to book some profit or take a few fresh open positions.
From here till the end of Jan when US FOMC meet will be there, we don’t anticipate any big upmove in Gold due to its overbought condition and bullish news factored in by the market. 55240 is the support where 20-day moving average is and we would recommend waiting for correction around that zone before taking a fresh position. Short positions should be avoided but any long positions can be booked at the current juncture. On the higher side, 56300-56700 is the resistance zone.
(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.)