By Bhavik Patel
It was a volatile market for gold this week as we had seen some very heavy moves in the currency market. Last week GBP was getting rattled after unveiling a mini budget which shot US dollar into the sky and the outcome was a blanket selling of all asset classes. While struggling against the U.S. dollar, the gold market is trading near all-time highs against all three major currencies namely Euro, Yen and Pound. Gold was trading at a 2.5 year low this week after which there was intervention from the Bank of England to keep their currency from collapsing in the way of buying long dated British bonds.
Gold prices welcomed the BOE’s dramatic intervention that avoided an imminent gilt crash and sent global bond yields sharply lower. This was somewhat expected and serves as a reminder that gold will do just fine once the global bond market selloff is truly over. However gold is not out of the woods as rates markets are pricing the potential for higher interest rates to persist for some time, and a steady stream of Fedspeak is likely to hammer this point home. This means the US dollar will continue to remain stronger creating headwinds for gold prices. US greenback has rallied 7% over the last 12 days, which could signify a technical blow-off top. What we are seeing right now is just that as an overstretched rally needs to cool down.
Historically, when the U.S. dollar has peaked, gold prices have rallied around 6% in the subsequent two months. It is difficult to say whether the US dollar has peaked or not at the moment but from a structural perspective, technically and given historical context, the US dollar is nearer the top and Gold is getting nearer its floor. Growing stress in currency markets could force the Federal Reserve to take a less aggressive stance at its November meeting.
For the moment, 48900 in MCX is the immediate support as twice the market has bounced from that level. In COMEX, $1600 seems to be support for now and if that breaches, then we may see levels till $1540. On the upside, 50800 and 51500 seems to be the resistance. For next week, we continue to advocate buy on dips as the US dollar rally seems to run out of steam temporarily and with risk aversion and recession fear, we might see safe haven buying. Long position can be held with stoploss of 48900 in MCX. Next week we don’t expect any major moves barring Friday when US non-farm payroll data will be released. After such a volatile week we expect prices to consolidate next week.
(Bhavik Patel is a commodity and currency analyst at Tradebulls Securities. Views expressed are the author’s own.)