By Bhavik Patel
It was a strong week for precious metals. Both commodities were due for short covering as there was a massive short position in Gold and Silver. Gold’s short position amounted to nearly $21 billion since 21st June and net length (long minus short position) was lowest since May 2019 while Silver’s net length was lowest in four year. So both were very vulnerable for short covering and US Fed and US second quarter GDP numbers provided the ammunition needed to fire Gold and Silver into the sky.
It was for the first time in 2022 that the US Fed appeared dovish as they stated that they have achieved neutral rate and now going forward, rate hike will be data dependent as well as pace of rate hike will be slow. This pushed both precious metals higher while USD retraced. The consensus seems to be that in September, we will only be looking for a 50-basis point increase, and it may get lower in October. Markets are seeing the light at the end of the tunnel. In just 40 days, the Fed raised rates by 150 basis points. Gold and Treasury long bonds may be top beneficiaries when tightening subsides
Markets are now focusing more on the threat of a recession than Fed rate hikes, which could weaken the U.S. dollar and cap bond yields. Another factor that is brewing along with the recession threat in the US is potential sovereign debt crisis in Europe. Last week the ECB announced a 50 basis point rate hike and also announced that it would continue to buy bonds from troubled nations to ensure the European bond market doesn’t fragment. Any sovereign crisis will give a further boost to gold prices.
Next half of 2022 might be beneficial for gold. First half of 2022, gold traded in a narrow range and consolidated but now factors seem to be lining up for an up move. First resistance for gold is $1768 and above that $1808. We expect gold to test $1800 in remaining period of 2022. Similarly in MCX, gold is poised to test levels of 53500 in second half of 2022. Now that prices have jumped from $1708 to $1762 in the span of two trading sessions, it is better to wait for some minor pullback before taking a long position.
Gold’s sentiment has shifted from negative to neutral to bullish. Above $1820, sentiment would change to bullish. In MCX, any dip near 50700 should be considered buying opportunity for target of 52000 and stoploss of 50250.
(Bhavik Patel is a commodity and currency analyst at Tradebulls Securities. Views expressed are the author’s own.)