By Bhavik Patel
Gold yesterday saw significant movement intraday where it jumped from $1802 to $1842 when PCE price index, favourite inflation gauge for US Fed came at higher levels than expected but subsequently gold also once again shed all the gains and came back to $1802. In MCX, however, gold opened higher as the Indian government has increased import duty of gold by 5%. Previous duty was 7.5% + 5% rate raised + 3% GST making total import duty at 15.75% (12.75% import duty + 2.5% agri cess + 0.75% welfare charge).
The initial reaction of the inflation report created bullish market sentiment for gold as it was perceived that this report would decrease the size of the next rate hike when the FOMC convenes for its July meeting. However the optimism remains short lived as on Wednesday US Fed reiterated that they will focus on bringing down inflation and soft landing might be difficult indicating US Fed’s focus on fighting inflation rather than saving the economy from recession. ECB President Lagarde on Wednesday repeated warnings that their central banks will keep raising interest rates even if their economies slowed down.
In COMEX, gold is at a six week low while silver is at a two year low. At the time of writing, COMEX gold is trading at $1801.75 and about to breach $1800. Below $1798, we might see prices tumbling to $1768. So gold is where generally buyers become active (around $1800) and we need to see if prices close below $1795 or bulls once again take the price to the mean average of $1830. It is the fourth successive day where gold has remained under pressure in COMEX. The market sentiment for the precious metal remains fragile amid concerns about the upcoming rapid increase in interest rates.
MCX however shows a different story for gold as prices have rallied due to increase in import duty tax. Usually sideways movement with low liquidity is a precursor to sell off which we saw in COMEX but in MCX, prices still are trading at the top end of the range namely 50000-52000. With sharp movement today, RSI_14 has jumped to 60 but we need to see if it’s sustainable as today’s price action is based on news. For investors, one should wait for gold to breach 52000 for taking a long position with expected target of 52700 and stoploss of 51500. Next week FOMC meeting minutes on Wednesday and US Non-Farm payroll numbers on Friday will be important for gold. Strong employment numbers will give bulls some joy that the economy is strong enough to withstand rate hikes while weak numbers could see fresh sell offs.
(Bhavik Patel is Commodity & Currency analyst at Tradebulls Securities. Views expressed are the author’s own.)