With gold gaining close to 15 per cent over the last year, investors increasingly feel that it may lose out steam going forward. However, we believe that it’s just a trailer for a blockbuster movie. Historically, gold has delivered positive returns in times of recession as investors perceive it as the best hedge in times of uncertainty.

We believe that the most important factor that should work in favour of gold is the Fed and other major central banks moving closer to peak rates and perhaps lower towards the end of 2023 or early 2024. The recent commentary of major central banks suggests that they would now prefer to adopt a wait-and-watch approach and be on the fence to see the effects of past hikes percolating into the economy.

This would in turn help long-term bond yields to moderate along with the weakening of the dollar. Moreover, the Fed has delivered the sharpest speed of policy tightening ever, raising rates by 500 bps spread over ten consecutive meetings since March 2022. The unprecedented aggressive policy stance has risked causing a sharp slowdown in economic growth, probably a mild recession, as we progress in time. The tailwinds from the combination of these factors should bode well for gold in the short to medium term.

Risk variables

In the anecdote, if the past few years are anything to go by, we have seen an array of shocks - trade war, the Covid pandemic, the Russia-Ukraine war, and so on, which appeared from nowhere and caught investors on the wrong foot. We believe that known risk variables such as geopolitics (e.g. Taiwan), monetary policy errors, liquidity crises, property bubbles, etc. along with the risk from the “unknown unknowns” should work in favour of gold going forward.

Another factor supporting the gold movement is the aggressive buying of haven assets by central banks across countries. The buying spree suggests the impending global recession and their intention to diversify from the dollar as it has strengthened against almost all currencies. As per the latest World Gold Council report (March 2023), global central banks and other institutions have purchased more than 1,000 tonnes of gold in the last three quarters (June 2022-March 2023 period).

To sum up, a lot of positive variables are at play currently for gold and it would be prudent to take a calibrated exposure to generate superior risk-adjusted returns.

Breakout from consolidation

Technically, gold futures on MCX have the potential to scale higher towards ₹63,650 in the short term, while in the medium to long term, prices can go as high as ₹75,500.

In January 2023, gold registered a breakout from a long consolidation (₹55,550) which continued for about two-and-half years, denoting a bullish signal for the medium-term trend. Post-breakout, prices trended higher for a few weeks and thereafter saw minor profit booking which got arrested around its previous resistance and 20 WEMA which signifies a robust price action. Gold experienced strong upward momentum from the said support and printed a life high of ₹61,845. Thus, following the overall chart structure, we believe that one must adopt a buy-on-dip strategy in this counter.

On the downside, key support is placed around ₹58,450, followed by ₹57,700. While on the higher side, applying the Fibonacci retracement technique, we sense MCX Gold to scale higher towards ₹63,650 in near term, and in the medium to long term, prices have a potential to test ₹75,500.

The author is Director of Research, Stoxbox. 

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