Fear factor in gold trade fading, investors play game of patience

By Aasif Hirani

The capital that was getting diverted to precious metals due to trade uncertainties is thinning. The short-term trend is subsiding. The Syrian conflict proved to be a boon for the precious metals, but the escalation did not happen, and gold prices have started to drop.

No new demand from the US meant the capital diversion from gold to equities continued.

The dollar’s rising appeal and spike in US treasury yield came as another headwind for gold. The 10-year yield has pushed higher than the all-crucial 3 per cent mark, a 4-year high. The short- term 2-year US Treasury note has hit 2.46 percent, highest since September 2008. With borrowing costs going up, investors are turning to the yield looking for better returns.

image2 (1)

The key factor driving gold prices is the US dollar. If we look at the technical chart of the dollar index, it was in oversold territory. Now that geopolitical tension is easing, we are seeing a recovery in the dollar. This, of course, is not positive for gold.

Also, the yellow metal technically is unable to sustain above $ 1,355 in COMEX as seen in the chart. For the last 2 months, it is trading in $ 1,355-$ 1,320. The Syrian conflict was the perfect set-up to move out of the range, but unfortunately, it didn’t materialise. Now, gold again is expected to trade in the range.

image1 (1)

The dollar index too was trading at a multi-year low in spite of a rising interest rate scenario. Finally, the metrics is showing some strength, which again will create headwinds for the precious metal. That means US equities and the dollar should draw in capital as earnings are picking up.

image3 (1)

We believe now is the time to take trading profit out of gold as the window of trade fears is over. Technically too, gold once again has started slipping from its resistance zone. The mean revision in gold comes around $ 1,330 and we expect it to trade sideways unless US places additional sanctions on Russia which again will dial up geopolitical concerns.

Gold bugs should wait for a clear breakout above $ 1,360 before they can breathe a sigh of relief. Till then, it’s again a game of patience.

(Aasif Hirani is the Director of Tradebulls Group. He has 12 years of experience in the finance industry. Views expressed in this article are author’s own and do not represent those of ETMarkets.com. Readers are advised to consult their financial advisers before taking any position based on these observations)