By Bhavik Patel
The gold market is struggling around $2,300 an ounce as the Federal Reserve continues to pare down its interest rate cut expectations. Gold had initially jumped after US inflation data came lower than expected. That fuelled hope that Fed may give some dovish comment and look to follow ECB and BoE’s path of cutting rates in September.
Earlier the core CPI (excluding food and energy) for May was up 0.2%, month-on-month and up 3.4%, annually. Both core numbers were also slightly lower than expected. This CPI report falls into the camp of the U.S. monetary policy doves, who want to see the Federal Reserve cut interest rates sooner rather than later.
Gold jumped from 71,400 to 71,990 after publishing of data but later on gave up all of its gains post FOMC press conference as only 12 out of the 19 Fed members thinks there might be two rate cuts this year.\
According to revised economic forecasts, the central bank will only lower interest rates once this year, as opposed to three as predicted in March. The Fed funds rate ends the year over 5.00%, according to the Federal Reserve’s interest rate estimate, which is sometimes referred to as the dot plot. This pushed gold and silver prices down as Fed is more conservative than estimated.
According to some economists, the U.S. central bank continues to keep its options open as inflation remains stubbornly elevated. All in all, nothing at this point suggests that a rate cut in September is impossible.
Everything is reliant on the data that arrives. Two rate cuts this year are still most likely if employment growth slows down once more and the May price statistics show that a fresh disinflationary trend is underway.
So we believe gold will consolidate in near term but in larger context, gold has nowhere to go but up. The Fed may be late to the party but once they begin cutting, history says gold will take off.
It doesn’t matter if the Fed’s the last man standing, the Fed will be cutting rates, and the U.S. dollar might not weaken initially, but next year when the Fed plays catch-up to everybody else, the U.S. dollar will be weakening and that is when we will see gold shine.
This week we expect gold to trade in range of 70,200-72,200 in MCX with any correction near 70,700 an opportunity to go long with stoploss of 70,000.
(Disclaimer: Bhavik Patel is a Senior Commodity/Currency Research Analyst at TradeBulls Securities. Views, recommendations, opinions expressed are personal and do not reflect the official position or policy of Financial Express Online. Readers are advised to consult qualified financial advisors before making any investment decisions. Reproducing this content without permission is prohibited.)
