By Bhavik Patel
Gold is bouncing from the lows of $1800 but the overall trend still is bearish. Small bounce might be because gold prices are trading near an oversold region but investors are reluctant to take long positions when fundamentals point to lower prices. Rally in US dollar and treasury yields are providing a lid to gold prices. The entire premium from the war between Russia and Ukraine has been eroded away and even if conflict worsens, we may not see any spike in prices as investors are focused on inflation and higher interest rates.
Precious metal could continue to struggle as the U.S. dollar trades around its highest level in 20 years. The widening gap in global monetary policy, with the Federal Reserve leading the charge on interest rate hikes, is supporting the U.S. dollar’s current rally. There are growing expectations that the Federal Reserve will raise interest rates by 50-basis points at the next three monetary policy meetings. This has made US Treasury yield attractive and investors are finding safety in the US bond market instead of gold. Historically we have seen that whenever the US Fed raises interest rates aggressively, gold prices have suffered but if the US Fed has raised interest rates slowly, gold has outperformed. The current scenario is the prior one so we are seeing gold prices struggling.
The US Fed is focused on bringing inflation down even if the US economy struggles. One of the reasons why gold and silver have seen significant selling pressure in the last four weeks is because investors have faith that central banks can engineer a soft landing that will weaken the economy enough to slow-growing inflation pressures but not enough to push it into a recession. But reality is with rising interest rates, there will be recession as the economy was up because of stimulus and there is more pain down the line. Ground reality is the world economy is struggling because of high crude oil prices. We believe long term, the US Treasury will be best performing asset followed by gold.
In MCX, weak INR has given some support to gold prices but still it is struggling to stay above 50000 levels. RSI_14 is at 40 after bouncing from the lows of 36 but in COMEX, RSI_14 traded at the oversold region of 30 before bouncing back. Prices are under the 20 and 50 day moving average indicating the trend is bearish. 51000 is the resistance and 49000 is the support where the 200 day moving average is. Next week we expect prices to trade sideways to bearish. Investors should wait before taking long positions. Any bounce back will be weak and succumb to selling pressure. Reversal will only come above 51500 levels.
(Bhavik Patel, Commodity & Currency analyst, Tradebulls Securities. Views expressed are the author’s own.)