MCX Gold outlook cautiously optimistic, yellow metal price may appreciate to Rs 53500 per 10 gram

By Deepak Singh

Gold has not done badly given the path of interest rates and the US dollar. Price corrections have been buying opportunities for more than 20 years. The long-term bullish trend remains intact despite the recent decline. While gold declined 20% from the March 2022 high ($2,070 an ounce), the price action remains impressive because of increasing interest rates and the rally in the US dollar. MCX Gold has advanced by 6% from Deepawali 2021 till now due to rupee weakness whereas Comex gold has dropped by more than 10% during the same period amid strength in the greenback.

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Source: Reuters

Wild ride for gold in September

The gold market was overwhelmed by the relentless strength of the dollar during September. The U.S. Dollar Index spent the month making new 20-year highs, driven by tough talk from the U.S. Federal Reserve Bank on inflation and expectations for continued rate increases. The dollar has also been the preferred safe haven globally as China imposed further COVID lockdowns and U.K. tax cuts prompted heavy selling in pound sterling. The gold price fell through long-term support at $1,680 on September 15 and continued to slide amid heavy outflows in gold exchange traded products.

The decline ended on September 28 when gilt market volatility caused U.K. pension funds holding liability-driven investment funds to get margin calls that threatened to take down the financial system in the U.K. The Bank of England had to intervene with emergency purchases of gilts to calm the markets. Gold became the safe haven, rising $31 as the greenback fell. This cut gold’s losses to $50.43 (3%) to end the month at $1,660.6 an ounce.

US inflation is still very much above 8%

(Source: Reliance Securities Research & Reuters)

The annual U.S. inflation rate was little changed in September, hitting 8.2% year over year compared with August’s 8.3% reading as the pace of price increases remains at multi-decade highs, causing pain for many households. High Inflation remains at the top of Americans’ minds going into the last quarter of a year of across-the-board volatility in food, gasoline and energy prices. While the Biden administration has sought to address the issue through measures like the Inflation Reduction Act, the provisions in that law are set to take effect over 10 years, and at least two separate models predict its actual impact on inflation will be statistically insignificant.

So the burden of bridling a stubborn inflation rate sits at the doorstep of the Federal Reserve. The central bank has already increased its benchmark rate five times this year — which included three consecutive 0.75% hikes — to make borrowing and spending money more expensive to cool off consumer demand.

Gold – Timing is critical(MCX Gold Rs. 50,350 per 10 grams / Comex Gold $1,632 an ounce)

Historically, whenever the spread between US 10 Year and 3 month treasury yields have gone below zero mark, it was succeeded by a recession in the US in next 2 to 12 months period. As seen in the above spread chart, in last 47 years, the same phenomenon has occurred for 4 times. Currently, the spread is at -0.03%, which is an alarming scenario. Another interesting observation is spread between the US 10 Year and 2 Year bond yields, which is currently at -0.42%. In last 47 years, only six times the spread has dropped below the zero mark and experienced a recession. Considering the same distressing circumstances, the safe haven flight may come to the yellow metals way if the world or the US deals with a recession in 2023. The probability of the same is high as agencies like IMF & World Bank has projected lower growth for the next year.

Also Read: Rupee falls to fresh record low, may hit 84 per dollar mark in near-term amid Fed rate hike fears, FII selling

Like the title, the timing is critical. For the last seven months, Comex gold has dropped continuously. From the highs of $2,070 an ounce, the yellow metal has come done to the level of $1,620 an ounce. The investment demand (SPDR Gold ETF) has been very subdued this year. The dollar has appreciated by approx 18%, nonetheless, the timing is critical. We recommend start accumulating the yellow metal as no one can gauge the bottom or top in the market. In case of a sharp short covering Comex Gold may travel higher to $1,780 an ounce in months to come. MCX Gold may appreciate to Rs 53,500 per 10 grams, considering Rs, 48,500 per 10 grams to be a strong buying/support level. Having said that, from current levels, the outlook is cautiously optimistic. Happy Deepawali!

(Deepak Singh is President & Chief Business Officer at Reliance Securities. The views expressed are the author’s own. Please consult your financial advisor before investing)