Gold has touched two year high. At present it is up over 25 per cent on year-to-date basis. Gold had accelerated to Rs 32,400 per 10 grams from Rs 29,500 before settling back to Rs 31,600. The metal witnessed a sharp rise after Britain decided to leave European Union in a referendum. Gold is considered safe haven and thrives when there is economic uncertainty and interest rate is low. Gold also got boost after Bank of England decided to ease capital requirements for banks following Brexit vote.
The fundamental factors for the rise in gold are simple. The US Federal Reserve is losing confidence to increase interest rate any time soon because of uncertainty about the outlook for growth at home and abroad. Last month US payroll data came at record low although this month US economy added 2, 87,000 jobs in June. Also US presidential election in November will add jitters in the market and will provide positive stimulus to gold. In Europe after Brexit, there’s speculation that policy makers may add to stimulus to calm the uncertainty, as well as mounting concern about weakness in Italy’s banking industry. On top of that, negative interest rates are becoming a global phenomenon started by Europe and followed by Japan. Compare to bonds issued by many developed countries which now has negative nominal yield, gold’s zero nominal yield is more attractive and considered as more safe investment.
So we can safely conclude that gold bullish trend is there to stay. It is not a short term phenomenon. Precious metals have been in bearish trend since 2011 and from 2015, the bull cycle has started. We had recommended pre Brexit to invest in gold and we still maintain that stance post Brexit. However, for short term traders we do recommend to book some profit. One of the factors for us to be caution is net speculative long in gold futures is currently at record high in commodity exchanges. This makes market increasingly vulnerable to correction.
If we look at major global brokerage reports, all are bullish in gold and market rarely functions on whims of mass consensus. Global gold holdings in ETFs topped 2,000 metric tonnes for the first time since June 2013 following the Brexit fallout. Traders who prefer to buy paper version of gold in form of ETF’s start buying when prices of gold rises (like equity traders start to chase stocks which are rising) contrary to physical gold buyers who wait for prices to fall to buy physical Gold. So at the current juncture, majority of the traders and speculators are on the same side making the market susceptible to short term correction.
In MCX, if we look at the chart, gold is in classic bull trend. At present, short term top has been placed and is now poised to re-test the support of Rs 31,000. Gold if it manages to stay below Rs 31,000 for a week, then only we would be short term bearish on gold. At present, Rs 31,000 is a level which is attractive for creating long position. Rs 30,700 is the next support level if gold manages to break below Rs 31,000. As we have stated earlier, at present juncture we are cautious in gold even though long term we are bullish but in the short term, investors should be booking profit at this level and wait for levels of Rs 31,000-Rs 30,700 before creating any fresh position. For long term investors, the gold bull cycle has started and they should wait for 2-3 years to reap gains.
(The author is director at Tradebulls)