by Bhavik Patel
US inflation data sparked a buying spree in gold as the precious metal jumped higher near $40. September inflation figures showed price pressures accelerating to 5.4% annually, slightly higher than the market had been expecting. Inflation is back to a 13-year high and with the stock market in overbought territory, we could see money shift from risky assets to safer ones like gold. We have seen stabilization of Treasury yields which is positive for gold. Now investors are expecting a rate hike sooner than expected. More persistent inflation could mean an increase in the Fed’s strength when it comes to tightening.
Gold is facing a massive resistance at $1800, and if it breaks this level, we could see a $20 jump immediately as there will be short covering. There is now a more than 90% chance that the Fed will raise interest rates by September 2022. Even the International Monetary Fund has been criticizing the US Fed, saying that inflation is temporary. The International Monetary Fund has warned that the Fed and its global peers should prepare contingency plans in the event of persistent inflation. This means raising interest rates sooner than expected to control price gains.
We believe that gold will bottom when the US Federal Reserve begins to scale back its asset purchase program. The anticipation of diminishing assets led to inflows into the US dollar and Treasuries and this is the reason why gold underperformed. Now the US Federal Reserve has put itself in a corner where there is a risk of stagflation with the labor market still not filling while inflation is rising. This will be beneficial for gold prices.
Silver should be superior in performance but it is not. If we have a weak economy combined with a drive towards needing and using more silver, then the closure of the base metal mines that produce silver as a by-product should lead to higher prices. There is no great supply of silver above the ground, so when the crisis in demand for silver comes, it can affect the price very dramatically, and in a very short period of time.
Gold broke the trend line and resistance at 47400 and is now looking to the upside. It also managed to close above the 200 DMA for the first time since July 15th. RSI_14 is near 64 so there is room for more upside. Next week we expect prices to rise up to 48500 and any dips should be an opportunity to buy with a stop loss at 46800. Meanwhile, silver is at the resistance level as we can see it on the daily chart. It needs a break of 63500 for the bullish momentum. We are bullish on gold and silver for the next week and any dip is a good buying opportunity.
(Bhavik Patel, Senior Technical Research Analyst, Tradebulls Securities. The opinions expressed are those of the author.)