MCX Gold displays a bearish reversal trend as traders fear US Fed rate hike; further correction likely

MCX Gold displays a bearish reversal trend as traders fear US Fed rate hike; further correction likely

By Bhavik Patel

As the Federal Reserve prepares to reach the final phase of its current tightening cycle, the gold market is once again beginning to shine. Next week we have the FOMC meet and the CME’s FedWatch tool is predicting that there is a 99.8% probability that the Federal Reserve will implement a 25 bps rate hike. We don’t think gold will be affected by the rate hike as the market has already factored in the hike but the commentary would be important. Any dovish stance would propel gold and silver higher but Fed will refrain from taking any dovish stance as they will wait for both CPI and PPI to meaningfully cool off.

Increasing central bank gold demand is a sign that governments are taking steps to reduce their exposure to a potential global sovereign debt crisis. One of the reasons gold is not taking off is gold is fighting with equity assets as equities world over are scaling new highs attracting investors money. Gold has taken a back seat right now among bullish equity market sentiment. Hard landing is not expected in the US this year which is pushing the equities market world over in a frenzy.

Gold: Technical Outlook

On the daily chart, MCX gold had a ‘Bearish Harami’ candlestick pattern at the top of the swing indicating a bearish reversal trend. Gold in COMEX had failed to clear $1986 while in MCX had failed to cross 60,000 levels indicating selling pressure at the top. With the FOMC coming up next week, there will be some profit booking on the cards as gold has rallied non-stop from 58,120 to 59,984.

We believe some correction is in order as many of the long positions will be squared off in anticipation of upcoming FOMC meet and traders staying on the sidelines and waiting for Fed’s commentary. Any long position should be booked and wait for some pullback around 58,900 before commencing fresh long positions. Support emerges around 58,600 while resistance still stands at 60,000 levels.

(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.)