Bears still not out of the woods

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Falling crude oil prices, a strong U.S. dollar index and rising U.S. Treasury yields are all bearish elements punishing the precious metals markets bulls. Speculative positioning in COMEX futures markets has dropped sharply since March as hawkish Fed narrative has driven money manager positioning to multi-year lows

The Nonfarm payrolls for August was 315,000, down from a downwardly revised 528,000 in July and somewhat higher than the consensus expectation of 298,000. Markets are now pricing in about a 75% chance of a 75 basis point rate hike at the next Fed meeting in September. The two-year yield hit a 15-year high of 3.551% overnight and the 10-year hit a 2-1/2 month high of 3.297%.

Market Analysts were thinking that the slowing of the economy would be enough to pause Fed hiking by November but Powell’s clear nod to restrictive policy points to a higher bar to a pause. Powell made it clear that there is no dovish pivot as some market participants had expected. Dollar at 20 year high, USDJPY at 24 year high above 140 levels, Euro at 20 year low below parity, GBP at 2.5 year lows.

Although the yellow metal faces significant downside risks, it also benefits from tailwinds including recession risk, a price-responsive physical market, already scaled-back positioning and elevated inflation. Gold will have some tailwind on back of recession fears as well as there are reliable signs of economic trouble. US 2 and 10 year yields are inverted by 35bps and 5 year/30 year by 5 basis point. If the Fed increases by 50 bps this September then we may see some short covering in gold prices. In the short term, the gold price will get its direction from macro data, especially the employment report, which will be out today

The Fed’s rate hikes have also triggered fears that the US economy will be dragged into a deeper recession in the coming months. As silver is largely an industrial metal, it suffers from any recession threat, which might include a slowdown in the job market. So silver is getting screwed on both ends: first as an industrial metal impacted by recession fears and secondly as a precious metal that doesn’t have an attractive safe-haven proposition now

Gold seems oversold, likely supporting the current bounce, with the next short-term resistance at around 1730 USD. If bears do not hold that level, the bounce could continue toward 1765 USD. Gold prices have been vulnerable and trading around its support levels of $1700 internationally and Rs 50000 domestically. Downside risk seems to be limited upto 2-3%, but in upside we can see returns upto 8-10% by the end of the year.

 

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