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Gold outlook: Any upside should be seen with caution; Fed interest rate hike, strong USD headwinds for gold

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There are headwinds for gold in the form of strong USD and Fed’s interest rate hike. We don’t see in near term any catalyst for gold to shoot higher.

By Bhavik Patel

Gold prices are near to its support of $1800. Breach below that could open doors to $1750. This week the US dollar has been strong as the US CPI came higher than expected and employment numbers came strong indicating that the US Fed will maintain their aggressive monetary tightening and rate hikes. This pushed investors into safety of US dollar and US Treasury yields. USD is trading at 20 year high while US Treasuries are trading at 3 year high. Many of the emerging market currencies are trading at all-time low against USD. The dollar has firmly put gold in the danger zone and a break of the $1,800 level could lead to further technical selling.  

The broad market selloff is creating a liquidity vacuum, which is hurting gold. The markets are currently pricing in a 93% chance of an additional 50-bps hike in June and a 90% chance of another 50-bps hike in July, according to the CME FedWatch Tool. Inflation is expected to remain high and thus the Fed remains under pressure to raise interest rates significantly. 

Bears have the firm overall near-term technical advantage and bulls would only be in charge above $1900. There are headwinds for gold in the form of strong USD and Fed’s interest rate hike. We don’t see in near term any catalyst for gold to shoot higher unless sharp short covering comes. This is the fourth consecutive week where hedge funds reduced their bullish bets on gold and increased their short exposure. Gold isn’t the only precious metal suffering. Hedge funds also continue to liquidate their bullish silver bets and increase their short positioning. We might see some short covering in near term as gold and silver both are near oversold regions but they are not out of the woods. It would be safe to wait for some bounce before shorting but shorting from current price does not justify the risk/reward ratio. 

RSI_14 in MCX on the daily chart is at 37 so there is room for correction as we have seen historically that gold bounces off temporarily from 30 levels.  At the time of writing gold is just shy above 50000 and that support was expected to hold but in the coming week, it might get breached. On the downside, now next support comes around 49200 and 48850 where the 200 day moving average is. The 20 and 50 day moving average has given a sell crossover so we expect prices to remain under pressure. Investors and traders should wait for further correction before venturing to buy. Any upside next week should be seen with caution as it might be short covering since huge short positions has been taken by money managers. So wait for some bounce before taking short positions while investors looking for buy on dips should wait for levels of 48850.

(Bhavik Patel is a commodity and currency analyst at Tradebull Securities. Views expressed are the author’s own. Please consult your financial advisor before investing.)

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