By Bhavik Patel
The headline this week was that gold broke its psychological level of $1700 and went as high as $1682 before bouncing back to $1713. Gold was weak throughout the week despite the weakness in the USD. Yesterday’s price action was volatile as the ECB, for the first time in 11 years, raised interest rates by 50 basis points and the EURO rallied, but quickly gave up all its gains after introducing the Transmission Protection Instrument (TPI) – a new bond-purchasing program aimed at further assisting indebted eurozone countries and preventing financial fragmentation subject to compliance EU budget.
The US Dollar rebounded, but gold still managed to rally its head above $1700 as the EU could enter a recession. Gold’s weakness this week has been attributed to waning inflation fears as global inflation appears to be peaking due to falling commodity and energy prices. This would be why gold struggled this week while the USD did not gain. Hedge funds turned negative for the first time in 3 years as speculators added shorts and covered longs. This shows a shift in sentiment, but we think sentiment may change if gold manages to break above $1786. However, the fundamentals still point to weak gold prices as next week we have the US Fed’s FOMC meeting. The Fed’s forecast for future rate hikes will determine the trajectory of USD and gold prices. If the US Fed becomes dovish, we could see gold prices rally.
The technical chart still indicates a downtrend as gold makes higher and lower prices. The prices are also trading below its 20- and 50-day moving average. Gold had taken support at its 200 day moving average of 49700 and that would be the immediate support. We don’t expect a significant rebound as gold has headwinds in the form of the US FOMC meeting next week.
Gold is close to its exhaustion level near $1686 to $1680. We have seen this week, twice, gold touch around these levels and bounce off them. However, if prices break below $1670, the next level of exhaustion is around $1568-$1558. Further short selling of gold is not possible given the risk/reward ratio. Investors should consider taking a more conservative trading approach and buying near the gold depletion level around $1686-$1680. In MCX, this level is around 49500-49000. Build a position around this level and take profit on a rally towards resistance points around 50500-51000.
(Bhavik Patel, Commodities and Currency Analyst, Tradebulls Securities. Opinions expressed are those of the author.)