Gold prices correcting as dollar firms; traders should buy around 55,500 zone but not over leverage

Gold prices correcting as dollar firms; traders should buy around 55,500 zone but not over leverage

By Bhavik Patel

After the best start of the year in a decade, gold has struggled to attract new investor attention this month. After a strong rally of almost $300 in 2 months, gold has shed nearly $130 from its highs. The reason behind this correction is the resumption of the USD rally. It started with robust jobs data that came higher than expected followed by rise in inflation. Retail sales also came higher than expected which all points to the fact that inflation will remain high as people are spending and the labor market is strong.

We still believe 2023 is stronger than 2022 as currently gold is facing hard impact due to the headline driven market but pretty soon technical indicators will come into play, and at that point, investors will believe that gold is becoming oversold and valuable at current pricing.  In COMEX, support of $1850 is already breached so now next support comes around $1825 and $1780. We believe around this zone, technical indicators will come into play and gold will look attractive. Despite all data indicating the US will see soft landing, the bond market continues to see otherwise. The US bond yield curve remains inverted with the spread between two-year and 10-year bond yields at its widest point in four decades. Even though the Fed will not cut rates in 2023, USD will not be able to sustain at higher levels which will be beneficial for gold.

In MCX, 50% retracement comes around 55,500 if we take from the lows of 52,130 and recent high of 58,847. So gold is near to its 50% correction which is healthy looking at the strong run up. Gold is currently taking support around the 50-day moving average but there is no indication suggesting bottom has been placed. We believe the correction will continue albeit at a smaller pace and re-test the support around $1786 and 55,500-55,000 in MCX. Any investors looking to buy can accumulate around that zone but should not over leverage or commit a large portion of their holding as indicators have not established any bottom in charts.

(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.)