By Bhavik Patel
Gold prices are steadily increasing on expectation of higher inflation. Today all important data of US CPI will be published with expectation of inflation coming higher at 7.2%-7.3% against 7.0%, a 40 year high. Many analysts are expecting that the Fed will be ultra aggressive in monetary policy as US jobs data came surprisingly better and with higher inflation, they have room to increase rates faster. But the fact is that the extreme level of inflation is due to supply chain bottlenecks. To get inflation levels down to acceptable levels that issue must be addressed. Simply raising interest rates will in no way affect the supply chain bottlenecks that are contributing to the rise in inflation which is running at a 40-year high. As such, if high inflation remains persistent over the next year or two it will provide strong tailwinds providing gold with continued bullish market sentiment.
Speculators and money managers however are taking their bets off gold prices and have increased their bearish exposure to gold after the Federal Reserve set the stage for a rate hike in March. Money managers dropped their speculative gross long positions in Comex gold futures by 32,331 contracts to 108,309. At the same time, short positions increased by 19,130 contracts to 58,395.
Gold’s net length now stands at 49,914 contracts, down nearly 51% during the survey period. Gold’s net length dropped to its lowest level since September. Despite short positions building up, we are seeing steady rise in gold prices. One of the reasons would be strong physical demand coming from China. It appears that demand for physical gold is off to a strong start, with anecdotal evidence showing healthy purchases in China ahead of the Lunar New Year celebrations. Chinese consumers are once again turning to gold jewelry as a quasi-investment and demand is being driven by growing geopolitical uncertainty, slowing of the domestic economy and the ongoing COVID-19 pandemic.
It would be very difficult to predict next week’s outlook for gold and silver as we are on the cusp of important data to be delivered today i.e. US inflation. If inflation data came hotter than expected, we might see gold jumping but it will be difficult to sustain as the market will expect a 50 basis point rate hike in March which will strengthen US dollar and US Treasury yields. We expect that even though inflation may come hotter than expected, US Fed will refrain from hiking 50 basis points and will hike 25 basis point. Gold is expected to test 49000-49500 this week or next week while support has been established at 47300. Last week’s strong US jobs data proved that gold has solid support at lower levels and we would advocate buying on dips as long as 47000 is not breached on the downside.
(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.)
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