Gold prices: Easy liquidity, Fed’s tapering, delta COVID variant to impact yellow metal; sell futures on rise

The persistent risk-on sentiment in addition is not favoring the demand for a non-yielding asset like yellow metal-Gold

By Amit Pabari

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The purpose of each asset has changed over the years. Let’s go through each one by one. The house was for living, but people are buying it for investment. The equity was for investment, but people are trading into it. Life insurance was for the protection of the financial needs of the survivor, but nowadays it is used for tax saving. Cryptocurrencies are for digital payments but people are gambling into it like crazy. Finally, the Gold was for the ornament or jewellery but the purpose shifted to portfolio hedge (inflation hedge). But we assure you that we will not shift our purpose of this article from outlook on gold to any other for sure. So let’s directly jump onto the key negative and positive factors of the Gold and come out with a strong conclusion.

Negative factors for the Gold are as below

Fed’s tapering, not good for the Gold: The fresh dot-plot released in the June meeting showed that the majority of the Fed officials are forecasting two rate hikes in 2023. Moreover, seven members now predict some upward moves by next year. These led to a spike in the short-term bond yield and a fall in the long-term one as future hikes started to discount and inflation too will be cooled off. Well, the increase in the bond yields is indeed bad for the yellow metal. Furthermore, any more hawkish stance of the Fed could strengthen the US dollar, and hurt the gold prices.

Easy liquidity from other central banks: Apart from Fed, no other developed market central bankers are expected to taper down their program or they are still favoring the ultra-loose monetary policy despite rising inflation. This leads to a risk-on demand for the equities which provide higher returns and doesn’t need any inflation hedge. Thus, as long as equities are in demand and flows are moving into riskier assets, Gold will be ignored.

Weak positioning for the gold: The recently released CFTC data suggest that the hedge funds are still bearish on the bullion on weakening fundamentals. Their position at the end of June fell to a half compared to the beginning of this year. Much of which occurred in the last two weeks of June, after the US Federal Reserve meeting. The negative bias on sluggish demand could materialize into weak positioning for the gold.

Doubt over Asian market demand: After trading in premium for a while in the first week of July, the bullion markets in Asia have turned cautious amid fears over the spread of the highly infectious Delta virus variant. Many countries are tightening their restrictions and stay-at-home orders- The Malaysian government extended stay-at-home orders indefinitely, Hong Kong officials banned flights from Britain. In Bangladesh, soldiers are patrolling the streets to check stay-at-home orders

But there are few positive factors as well that could support the gold prices.

US unemployment rate is not even near to pre-pandemic levels: Last week’s release of June Non-farm payroll was quite mixed from Fed’s perspective as the economy added 850K- well above forecasts of 700K; wages increased slightly less than expected while surprisingly the unemployment rate edged up to 5.9% from 5.8%. This is not even near Fed’s target of 4.5% for 2021 or the pre-pandemic level of 3.5%.

However, price pressure is very high on the Fed to compromise on the unemployment rate to go for a tapering and rate hike.

Long-term rates are not rising and real rates are negative: Compared to the 2013 taper case, the long-term yields can be seen falling against a rise in the short-term yield after the FOMC policy. In short, the yield curve started to flatten as the market was pricing in the rate hike and inflation expectation tame down. It has been observed that the gold prices are very much linked to the long-term rates. Thus, other things being constant- falling long-term rates could be supportive for the gold.

Technical on International Gold ($/Ounce)

The below daily chart of international gold suggests that prices have shown some pullback after bottoming near $1750 levels. However, retracement suggests that prices should find resistance near $1814 to $1834 levels. If the rally extends further than the maximum it could move towards $1855 levels. Broadly, after finding resistance at given levels; the prices are expected to resume their downward trend to retest $1750 levels. Over the medium term, if that level is breached then it could look to move towards $1670 levels. Hence, the uptick is likely to remain short-lived and we can expect it to continue its bearish momentum shortly.

Sell Gold future on rise close to Rs 48,500 for a target of Rs. 46,800 – 46,000 levels with a stoploss of Rs. 49,400.

Conclusion

Considering both the negative and positive factors, gold prices are likely to choose negative heavyweights as Fed is ready to trigger its taper gun anytime soon-ignoring the unemployment rate and thus dollar index could remain bullish on recovering short-term yields. Further, other developed central bankers are expected to continue their calmness and thus US yield will be having an advantage over other DM yields. The persistent risk-on sentiment in addition is not favoring the demand for a non-yielding asset like yellow metal-Gold. And hence, one can expect it to continue its bearishness towards $1750 and $1670 after topping out near the $1834-55 zone.

Strategy for gold traders

US dollar per ounce: We suggest gold traders to sell on uptick towards $1834-55 zone for a target of $$1750 – $1670.

MCX gold: We suggest selling Gold future on rise close to Rs 48,500 for a target of Rs. 46,800 – 46,000 levels with a stoploss of Rs. 49,400.

(Amit Pabari is managing director at CR Forex Advisors. The views expressed are the author’s own.)