By Jigar Trivedi
Comex Gold dipped below the $1,870 mark on Friday, a level not seen in more than three weeks, pressured by a stronger dollar and a pick-up in Treasury yields after hot jobs data fanned concerns about hawkish central bank policies. The Labor Department’s closely watched employment report showed that US employers hired more workers than expected in January, with nonfarm payrolls increasing by 517,000 last month. This report brought a higher degree of uncertainty regarding the Federal Reserve’s next move while dashing expectations that the Fed and other central banks will soon end their tightening cycle. Comex Gold has now lost more than 3% this week.
The yellow metal has surged over the past two months with expectations that the US Federal Reserve will slow its interest rate rises. We have increased our 2023 price outlook slightly based on the faster-than-expected pivot in US interest rate policy and the return of Chinese demand after Beijing’s U-turn on its zero-Covid strategy.
MCX Gold April futures has ended on a negative side amid a strong rebound in the dollar index. Before, MCX gold declined, for yet another time it hit a record high at Rs. 58, 847 per 10 gram as it witnessed a couple of major events. MCX Gold prices rose over 1% on Wednesday as FM Sitharaman announced that the basic customs duty on articles and items made from gold bars will be hiked in the Union Budget 2023. Later when the Fed pushed the fund rates higher by quarter point, voiced a slightly dovish undertone for the second half of the year which hurt the sentiment in the dollar index and the international gold at one point of time hit $1,960 an ounce, hold at its highest level in over nine months as investors digest monetary policy decisions from major central banks.
On Thursday, the metal dropped nearly 2% from nine-month highs as investors took some profits off the table following a rally driven by expectations of less aggressive central bank policy tightening. The US Federal Reserve delivered a smaller 25 basis point rate hike and said it has made progress in the fight against inflation on Wednesday, while the European Central Bank and the Bank of England said inflationary pressures in their economies have become more manageable. Gold is highly sensitive to the rates outlook as higher interest rates raise the opportunity cost of holding non-yielding bullion and vice versa.
Central banks’ gold buying hits record highs
Central bank buying in the first nine months of 2022 was the highest since 1967, according to the World Gold Council. During times of economic and geopolitical uncertainty and high inflation, banks appear to be turning to gold as a store of value. Last month, the world’s official financial institutions bought 673 tonnes. In the third quarter alone, central banks bought almost 400 tonnes of gold – the largest quarterly purchase since records began in 2000.
The buying in the third quarter was led by Turkey with 31 tonnes, taking gold to about 29% of its total reserves. Uzbekistan followed with 26 tonnes, while in July Qatar made its largest monthly acquisition on record since 1967.However, ETF holders haven’t shown a shift in sentiment just yet. The gold rally still lacks support with total gold held by ETFs falling 0.2% so far this year despite rising prices.
Outlook for Gold
The undertone / outlook is bullish however, we also caution the traders since prices have continuously been rising only. Since November 2022, MCX gold has appreciated only and we have not seen any major pull back in the prices, we continue to hold the positive view nonetheless, we don’t deny the probability of a technical rebound in the commodity. Rs. 57,000 / 57,400 per 10 gram is a resistance and Rs. 56,300 – 56,000 per 10 gram is a support, and we recommend to short on every bounce.
(Jigar Trivedi, Senior Research Analyst – Currencies & Commodities, Reliance Securities. Views are author’s own. Please consult your financial advisor before investing.)