Sentiment in gold on a short-term basis has changed from bullish to bearish in the span of one week as we have seen strong damage on the chart when gold corrected from $2030 to $1964. Two things were considered to be factors behind this fall in gold prices. One was US dollar strength as there were noises that the US may default if they don’t raise their debt ceiling by 1st June. However, President Biden has assured that talks have been meaningful and that US Congress will raise the debt ceiling.
The second reason for the fall in gold prices was hawkish monetary policy from several Fed members where many members stated that it was too premature to start thinking of cutting rates or that rates were not yet at a point where they could hold steady. Along with strength in the US dollar index, regular profit booking also led to sell in gold prices as there are no fresh triggers for buyers to propel the price higher. Moreover, another reason for bears to come into play is the robust US economy. Recent economic data reveals a robust economy in the United States that is continuing to recover from the pandemic recession.
Statements by Federal Reserve officials combined with recent solid economic data have dramatically influenced the probability of what the Federal Reserve will announce at the next FOMC meeting which will begin on June 24. According to the CME FedWatch tool, the probability that Fed will pause the rate in the next meeting has fallen from 89.3% a week ago to 58.6% and the 25bps rate hike probability has risen to 38%.
Gold is near to its support zone of $1950 and if that support fails to hold, we might see some more selling pressure. Its too soon to say that gold has bottomed out as we have to see if levels of $1950 hold but we might be close to the bottom as gold has good support in range of $1920-$1900. Gold is expected to trade sideways as there is no catalyst to take prices above $2000 right now.
A long ‘bearish belt hold’ candlestick pattern on the daily chart is enough to confirm the change in trend from bullish to bearish in the short time frame. Gold now is near its 50-day moving average both in MCX and in COMEX. Just like gold has support around $1950 in COMEX, 59500-59200 is the immediate support for gold in MCX. The next support is at 58500 like the next support in COMEX is at $1920. We believe gold is near the bottom as the momentum oscillator is also showing decent correction from the overbought zone to the current level of 44. We would wait for the price to stabilize around 58000-58500 before recommending any long position. A short position can be avoided as prices are near to their support zone. Right now we are purely in wait-and-watch mode and not recommending any fresh position from the current juncture.
(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.)