Gold hits record high on weak US data and banking jitters, Caution persists amid speculative rally

The breakout has been spectacular and has baffled many traders with the ferocity of the move.

Gold had given best weekly gain since last September. This latest rally is not broad-based but rather fueled by a jump in speculative betting as there is no gold rush among Western investors right now, not in physical bullion and not outside Comex futures and options.

ETF inflows have also not increased. In contrast to persistent central bank demand for the precious metal, gold-backed exchange-traded funds have cut their holdings for seven consecutive months.

According to the CME’s FedWatch tool, there is a 97% probability that the Federal Reserve will not begin to cut rates at their March FOMC meeting and a 79.1% probability that the Fed’s benchmark Fed funds rate will remain unchanged at the May meeting.

On Wednesday, Fed Chair Jerome Powell reiterated to lawmakers that the US central bank is in no rush to cut interest rates until policymakers are convinced they have won their battle over inflation.

There’s no doubt that short covering in the futures market has helped boost the rally, but the move is too big for that to be the main driver. It is surprising to see the rally in gold where US dollar is still up and Silver has not been able to match gold’s move.

The ISM manufacturing PMI data for February released on March 1, came in well below expectations, highlighted the rising risk of a stock market correction, and may have prompted some investors to move from equities to gold.

Gold continues to rise, but technical studies suggest gold is overbought. Whenever RSI_14 has traded above 81, we have seen bouts of corrections and despite the momentum showing strong upward trend, we are cautious in holding long positions at the current juncture.

One can either book profit at current levels and wait for correction to the tune of 3-4 percent before taking fresh long positions or one can be brave and buy PE options with strict stoploss. All in all, the upward trend in gold is here to stay and we may see short term correction and consolidation before fresh new all-time high.

(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.)