By Bhavik Patel
The US inflation data triggered a buying spree in Gold as precious metal jumped near $40 higher. September’s inflation numbers showed price pressures accelerating to 5.4% annually, slightly more than the market was expecting. Inflation has returned to 13 year high and with the stock market being in an overbought zone, we might see money shifting from risky assets to safe haven assets like Gold. We have seen Treasury yields flattening which is positive for Gold. Now investors are anticipating a rate hike sooner than expected. More persistent inflation could mean a more aggressive Federal Reserve when it comes to tightening.
Gold is facing massive resistance at $1800 and if it breaches that level, we may see a jump of $20 straight away as there would be covering of short positions. There’s now over 90% chances that the Fed will raise rates by September 2022. Even the IMF has been critical of the US Fed stating that inflation is transitory. The International Monetary Fund warned that the Fed and its global peers should be preparing contingency plans should inflation prove persistent. That would mean raising interest rates sooner than expected to control the price gains.
We believe gold will see its bottom when the US Fed starts tapering their asset purchase program. The anticipation of asset tapering has triggered inflows into US dollar and Treasuries which was why gold was underperforming. Now the US Fed has painted itself into the corner as there is risk of stagflation with the employment market still not full while inflation is running hot. This will be beneficial for gold prices.
Silver should be outperforming but it is not. If we have a weak economy coupled with a drive towards needing and using more silver, you’re going to have base metal mines shutting down that produce silver as a by-product which should shoot up the prices. There is no large supply above ground of silver, so when a supply demand crunch comes on silver, it could affect the price very dramatically, and in a very short period of time.
Gold has broken the trendline and resistance of 47400 and is now looking bullish. It has also managed to close above 200 DMA for the first time since 15th July. RSI_14 is around 64 so there is room for further upside. For next week, we anticipate higher prices till 48500 and any dips should be an opportunity to go long with stoploss of 46800. Silver meanwhile is at the resistance level where we can see on the daily chart. It needs to breach 63500 for upside momentum. We are bullish both in gold and silver for next week and any dip is a good opportunity to go long.
(Bhavik Patel, Senior Technical Research Analyst, Tradebulls Securities. Views expressed are the author’s own.)