By Priyanka Sachdeva, Senior Market Analyst, Phillip Nova
According to our senior market analyst, Priyanka Sachdeva, the ambiguity of the FED rate projection and the Chinese failed stimulus attempts have both contributed to a deadlock we are currently witnessing in Gold. While that does seem like a standstill, it could very well be some silence before thunder. Financial markets are infamous for having a stronger outbreak rallies following a long consolidation period.
Despite its track record, some feel that Gold has lost its lustre as a historic hedge against uncertainty. Priyanka does not really see anything better than Gold, to park your capital safely while riding the wave of uncertainty. However, China’s stuttering economy is now the biggest threat to global commodities demand, and the rising trend in oil prices poses challenges for the Federal Reserve, and together these events are hampering Gold’s appeal.
Meanwhile, Gold holding at its favourite $1950 mark is a very bold and bullish signal from the yellow metal ahead of the Federal Reserve rate decision tonight. When it comes to range-bound fluctuations in bullion over 3 months, it is heavily supported at the low 1900’s level while missing a catalyst that can drive it up to the test the 2000 level.
Leaving aside speculators, investors such as hedgers, arbitragers, or short-term trend players have likely benefited from Gold’s confinement to a range bound mid-1900s trend. Traders are looking to enter at low 1900’s and hold with a stop loss in mind for small bits of profits.
Even traders who use Gold as a hedge when they trade inversely related assets like dollars have benefitted from Gold’s resilience around the 1900’s. Gold is used by different investor classes in many different strategies and there are always opportunities available when it comes to the yellow metal.
Looking ahead
The risk in the form of persistent inflationary pressure continues to cloud Gold markets. How long the Federal Reserve rates will stay elevated is debatable at this point in time and the prospects of economic weakening or recession, which could have boosted the appeal of Gold have also been extinguished.
Gold markets are pricing a scenario of a soft landing despite last week’s US CPI numbers projecting a slight jump in inflation. While Gold markets may cheer a pause in Fed rates tonight, it could be short-lived as the future projections are still ambiguous, making Gold’s flight bumpy.
There can be one or two more hikes by year-end and as of now no rate cuts are priced in till early 2024. As we know, a rising rate does not bode well for dollar-denominated Gold.
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