Buy gold if CPI inflation remains high, support at Rs 51100 per 10 gm in MCX for next week

Buy gold if CPI inflation remains high, support at Rs 51100 per 10 gm in MCX for next week

By Bhavik Patel

Gold has seen its sixth straight month of losses from April to September as demand for precious metals declined despite inflationary pressures and geopolitical risks. Rising bonds and strong rally in US dollar have created strong headwinds for gold. Despite US Treasury yield trading at 3 year high and US dollar trading at 20 year high, gold has kept its head above $1700. If we look at how much gold should have been down looking at how far bond yields have appreciated and US Dollar’s rally, gold should have been down by almost 21% this year. But gold has got support from recession fears and some geopolitical tension. 

Last week, when gold prices dropped to a two-year low, the market was down roughly 12% since the start of the year. This week, the precious metal has seen a short-covering rally pushing prices back above $1,700, cutting the loss to 6% year-to-date. Another reason for gold’s nonperformance was speculators position in gold. Speculators had created short position (highest in three years) and so any bounce was getting sold into. However retail investors are stepping in to buy the physical. Premiums for gold and silver remain extremely high, an indication of a tight physical market. Healthy appetite for gold is particularly visible in China as the nation can’t important enough gold to meet demand as premiums hit record levels. China’s gold import is at four year high.

Two important events will give further direction to gold and they are US employment data on 7th Oct and CPI inflation report for September which will be released on October 13. Economist will focus on whether or not the labor market is showing signs of contracting as a positive indication. So weak employment data would be positive for equity and gold despite it being bad news. This is because slower growth will help Fed loosen its pace of rate hike to fight inflation. If employment data came higher than expected, then US Fed will stick to its strong rate hike policy and we may see more selling in gold. But the most important report that the Federal Reserve will use in their decision process about their monetary policy is upcoming CPI inflation report for September.  

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Gold is expected to climb once the Fed is done hiking. US dollar should ease during the course of next year as Fed is unlikely to raise its interest rate any further after the first quarter of 2023.

In MCX, we would recommend to wait for 12th Oct US CPI data to be published before taking any position. Intraday traders can buy on dips but for traders looking for medium term trade, they should wait for release of inflation data which will give investors and Fed idea about how far they will take rates high. Any softness in inflation will be positive for gold and investors can buy but if inflation remains high, then investors should wait for correction before taking long position as market would see some knee jerk reaction. 51100 is the support in MCX for next week while resistance is at 52800.

(Bhavik Patel is a commodity and currency analyst at Tradebulls Securities. Views expressed are the author’s own. Please consult your financial advisor before investing.)