By Bhavik Patel
Gold market witnessed outflows in the ETF during the month of July. It coincides with the drop in prices where in July we saw gold going below $1700. Around 81 tonnes of outflow was seen in July. July was also the month where net short reached highest in the last 3 years. Gold also faced headwinds in the form of a stronger US dollar, weaker Brent crude prices following softer growth data and lower implied volatility.
However sentiment has changed from July’s bearish trend to neutral trend at the onset of August month. One of the key reasons was the US Fed’s statement that they have reached a neutral rate and going forward they will be data dependent and the pace of rate hike will be slowed. This prompted buying in gold, however this week US house speaker Nancy Pelosi’s visit to Taiwan and some members from Fed statement that they will bring inflation under control once again halted the rally in gold. But bulls have upper hold as gold recovered its losses and now is knocking on the door of $1800. This has been thanks to rise in geopolitical concerns after China firing several ballistic missiles around Taiwan in retaliation for U.S. House Speaker Nancy Pelosi’s visit.
It is classic safe haven play where gold and Treasuries rose in tandem with the U.S. dollar and the Japanese Yen. The big obstacle for gold is Friday’s July employment report out of the U.S. Expectations of a stronger-than-anticipated report could quickly put a cap on the prevailing bullishness among gold bugs.
The reversal of gold prices was on the wall when we saw record bearish positions in July. We find that when small speculators get too bullish, it is almost always a sign that we are near a top. But when they get too bearish, it is almost always a sign that we got a bottom on our hands. Hedge funds were net short highest in 3 years and small speculators are net long 92,690 contracts for gold, which is their smallest long position since May of 2019.
On domestic front, RBI hiked repo rate by 50 bps which was expected by the market. Indian rupee did recover from the lows but still geopolitical concern will keep USD stronger. We had record current account deficit this month which also prompted Indian rupee to depreciate sharply giving cushion to MCX gold prices. RBI is unwilling to accept growth sacrifice to bring down inflation which will keep rupee weak and helping MCX gold prices.
Charts on MCX do suggest that we may have a rally. MCX chart is more positive compared to COMEX chart on account of weak rupee. In MCX, gold is at 5 month high however emergence of ‘bearish belt hold’ candlestick pattern on daily scale suggest gold may face headwinds going forward and may retrace somewhere in the vicinity around 51500-51200. Breach above 52500 may propel gold till 53200-53500. Gold has taken support around its 200-day moving average around 49700 and we can say bottom is in place for gold. $1800 also is proving to be strong resistance in COMEX and so any further rally will only commence above $1805. So any fresh positions can be taken around 51500 with stoploss of 50900 and expected upside target of 52500-52800. Buy on dips should be the strategy as near term fundamentals still point to upside in gold prices.
(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.)