Will the bullish rally in gold towards all-time-high continue?

“Water is best, but gold shines like fire blazing in the night, supreme of lordly wealth”- Line by Pindar, Ancient Greek Philosopher.

This line perfectly describes the feature of gold which has recently outperformed over other markets. Gold- as a store of value for over 2,500 years has posted a return of almost 8 percent in May as a result of rising inflationary pressure and declining US real yields. Our report on gold dated 28th April 2021 when the spot was around $1775, has achieved its near-term target of $1830 and $1850. Further, it is currently quoting near the next target of $1920.

Moving ahead, will gold sunshine further or lose its value? Let’s analyze the crucial factors which will decide the short and medium-term trend.

US is outperforming, but inflationary pressure support Gold

The US vaccination progress has been remarkable as 57 percent of the population is immunized. Further, strong reopening with putting off masks in public has created an optimistic environment. In recent times, the hottest question is “will current inflationary pressures be transitory or persistent?” If this question is asked to Fed, definitely they will answer “Transitory”. But let’s check the reality. The current rate of inflation is 4.2 percent, which is well above the fed’s target of 2 percent. And expected inflation is quoting at the highest level since 2013. Additionally, the higher commitment of fiscal expenditure from Joe Biden’s administration and ultra-loose monetary policy from the Fed is expected to keep the inflationary environment intact. So in an environment where the US is outperforming other markets, inflation could remain well above targets, and thus appeal for inflation-hedge investment like gold remain higher.

Digital Gold-Bitcoin failed to make presence, real gold in demand

When real gold was suffering in the first quarter of the year, Bitcoin being the new era inflation hedge was skyrocketing and also as a result of increased institutional adoption. But nail-biting momentum after Tesla’s rejection and tighter policy on the crypto market from Chinese authority slashed the Bitcoin market to just half from $64,000 to $30,000 in one month. The happy realization from traders is reviving trust in the real gold again and could spark light on the Gold prices.

Rising interest in Gold ETF and favourable CFTC position

The biggest gold ETF, the SPDR Gold Trust, showing holdings at 33.568 million ounces as of last Wednesday from the 29th April 2021 figure of 32.669 million. The recently released data suggests that speculative interest in gold has risen for four consecutive weeks as money managers increased their speculative gross long positions in Comex gold futures by 2,086 contracts to 143,862 and decreased their short positions by 13,179 contracts to 36,607. Overall, the market is positioning in favor of higher gold prices.

Technical analysis on Gold

The weekly chart of international gold suggests that prices have given a breakout from a downward slopping trend channel around $1857. In the near term, the bullish momentum is likely to continue further up to our target of the $1950-1960 zone. And if it crosses those levels then over the medium term with a view up to 3 months, we can expect it to touch $2000 and $2075 levels. On the flip side, the breakout point of $1857 will act as crucial support levels below which the uptrend will turn its bullish trend to sideways or bearish.

Overall, we expect that as long as US economic data are lagging behind the market expectation and members are refraining to turn hawkish, the real yield is likely to remain on the negative side and hence gold is likely to run the show. The return of demand for gold as an alternative to Crypto attracts trading and investment flows. Hence, the rally in gold prices is likely to continue further upto $1950-60 levels. If that is crossed convincingly then targets of $2000 and $2075 can be easily placed. For this, it should trade well above strong support of $1857. The Mumbai 24 caret gold which is currently quoting at Rs. 47,900/-(10 grm) is expected to test Rs. 49,500/- to Rs. 51,000/- on account of strength in international prices and expected depreciating move in the Rupee against USD. On the lower side, it has key support at Rs. 46,800 levels.

-Amit Pabari is managing director of CR Forex Advisors. The views expressed are personal.

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