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The Demand for Inflation-Hedging Commodities – Is Gold Back?


“Gold is eternal. It is beautiful, useful and never wears out. No wonder gold has been prized above all else, at all ages, as a store of value that will survive the trials of life and the ravages of time. – James Blakeley

Gold and other precious metals have long been a storehouse of wealth for mankind, from the oldest civilizations to modern times. And throughout the centuries, many, many people have talked about it. This is visible, as the world’s central banks and the International Monetary Fund still have chests full of bullion, even though currencies are no longer backed by gold. Governments cling to it as a kind of magic symbol, a way to reassure people that their money is real.

Bullion has always been presented as a hedge against inflation. And recent concerns about widening inflationary risks have preserved the bullion’s appeal as a safe haven. Let’s analyze some technical factors that could push the price of the precious metal even higher:

Undergrounded US real returns:

The real interest rate is an interest rate that has been adjusted to eliminate the effects of inflation and that reflects the real cost of funds to the borrower and the real return to the lender or an investor. Gold has a strong inverse relationship with the US real interest rate, which has resumed its descent into negative territory since March. The correlation between real interest rates and the price of gold is around -0.80. In other words, when real yields go down, gold goes up. This correlation explains why inflation is gold’s best friend while rate hikes are its worst enemy and signals that gold prices are undervalued for the current yield level. Thus, the yellow metal will continue to benefit from a bullish momentum as the fall in real interest rates persists.

The Fed’s announcement of the start of asset purchases was dampened by signals of delay in rate hikes. This means that as long as the nominal yield does not bite inflation expectations, the real yield is likely to remain negative and this would favor gold to be poised to regain the $ 1900 levels.

The festive and matrimonial demand in Asia could be tied

The US and Europe saw net outflows throughout the year due to the Fed’s phased-down announcements and heightened expectations for interest rate hikes. However, in the Asian Belt, gold-bearing exchange-traded funds (ETFs) continued to gain the attention of investors as they collected net assets worth Rs 303 crore in October amid festivals, New Year’s Eve. Chinese year, gifts and the start of the wedding season, thus keeping the demand for metal intact.

Chinese ETF holdings were on the rise due to their weaker economic data and the subdued performance of the stock markets after the EverGrande issuance, according to the report. While in India, increased equity volatility due to inflows and a correction in the domestic gold price pushed holdings in Indian ETFs on gold. In fact, demand for physical gold has been found to be more encouraging, with Chinese imports averaging 25 t compared to 10 t last year. The premium for physical gold has recovered in both China and India, unlike developed countries.

Gold investment in SPDRs and ETFs is on the rise

The ETF’s holdings of gold saw inflows, with holdings in SPDR gold stocks reaching 976 tonnes (the highest level since June-2021). However, gold had moved lower in early November, with the December COMEX futures contract hitting a low of $ 1758.50 ahead of the Fed policy meeting. However, after the word “transient” came up again at the Fed meeting, gold has steadily risen. And it broke through a critical level of technical resistance at the mid-July high of $ 1,839 after U.S. inflation soared to an annual rate of 6.2% in October, the highest since December 1990 and with expectations to continue to rise.

CFTC post:

Speculators rushed to gold futures as real yields fell and the dollar weakened after a slight dip in U.S. inflation expectations and mixed comments about rising prices. Fed rates weighed on market sentiment and pulled the US dollar to 95.73 levels. The CFTC’s broken down report on trader commitments showed that fund managers increased their gross speculative long positions on Comex gold futures from 31,189 contracts to 168,133.

At the same time, short positions fell from 9,182 contracts to 41,523. In other words, the 48% jump from net long to a 10-month high at 146,000 lots occurred before price. does break the key resistance at $ 1,835. The rally that followed at the current level around $ 1,870 undoubtedly led to an increase in length, and with the dollar still roaming and yields showing unclear signs of a rise.

However, the only headwind for the yellow metal might be the following:

Falling Fed market, nominal yields react to inflation expectations:

While gold has performed very well as an inflation hedge over the past fifteen years, a slight tightening of the Fed’s monetary policy will drive real Treasury yields a bit more. Investors assume that higher inflation will go hand in hand with tightening central bank monetary policy, keeping the dollar strong and bullion under pressure.

Technical configuration:

The weekly chart below for international spot gold suggests that prices have moved out of a congestion area or some sort of triangular area. It gave a clear break above the $ 1,832 levels. And now it is heading towards its resistance of the $ 1915 levels. If this is removed, we can expect a further rise towards the $ 1960 levels. Any correction towards $ 1832 will be an opportunity to be long on gold. Additionally, support sits at levels of $ 1790 and $ 1760 which seem far from being tested in the short to medium term.

Outlook:

In summary, market participants will remain focused on inflation and what it means for the political prospects of major central banks in the near term. Feedback from FOMC policymakers will be critical in determining whether the Fed will prioritize controlling inflation over supporting the economy. Gold is expected to maintain its ‘wanted asset’ status in the face of unwanted inflation and will move towards its resistance zone of $ 1915 levels with a constant bullish bias, until the bulls in the dollar come back into the market. .

International Gold Levels:

Buy on lows near $ 1832, target 1915-1960, support 1790 & 1760

National Gold Levels:

Any correction to 48300 is a buy opportunity, target 50700 and 51800. Next support 47800.

—Amit Pabari is the Managing Director of CR Forex Advisors. The opinions expressed are personal.

(Edited by : Anshul)

First publication: STI


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