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Sky-high inflation, global growth concerns bode well for gold; buy-on-dips strategy recommended: Axis Securities

Current fundamental and technical indicators signal a revival in gold prices. From a technical perspective, if gold were to breach $1,750-1,760 levels, we could witness levels of $1,800. So adopting a buy-on-dips strategy is greatly recommended, said Pritam Kumar Patnaik of Axis Securities.

August 01, 2022 / 02:43 PM IST
Representative image.

Representative image.

The July Federal Reserve meeting was a directional shift for the entire financial markets, as the US central bank abandoned its forward guidance stance and moved towards a more data-determined policy stance. Fed Chair Jerome Powell didn’t do much to push back on market expectations that we’re on the other side of peak Fed hike expectations.

After a long period, the Fed tone has turned marginally dovish, even though there could be additional rate hikes, but not to the aggressive tune of 0.75 basis points. With the inflation trend close to peaking out and the US economy entering into a technical recession, going forward, the state of future macroeconomic data will dictate the Fed’s policy actions.

The recent weeks have not been too encouraging from a data standpoint, which could have led to the change in the stance of the Fed. The Eurozone, grappling with a slowing economy and prohibitive energy costs, could well be the first entrant into the real recession club. The International Monetary Fund (IMF) has forecast global growth of 3.2 percent for this year and 2.9 percent for the next. The forecast fell by 0.4 percentage points, and 0.7 percentage points from the April report.

Sky-high global inflation, a worse-than-expected slowdown in China, and the adverse effect of the Russia-Ukraine war are weighing on the global growth outlook. Additionally, the ongoing Russia-Ukraine war and the occasional COVID lockdowns in China have caused severe supply-chain bottlenecks, thus, making the inflation trend far from comfortable levels.

Gold is often viewed as a hedge against inflation. We do not expect inflation to return to the Fed's 2 percent inflation target in the medium to long term. Inflation is sky-high globally and is expected to stay elevated in the coming days. Hence, gold would probably benefit from this as an inflation hedge.

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The bullish run for the dollar index also seems exhausted and looks highly unlikely that the same will resume with the intensity we had witnessed for the last few quarters. Further, these developments mean that US real yields are likely to fall back in the near term. These slow-down worries and high inflation, coupled with a falling dollar and US bond yields, essays well for gold prices.

Keeping all the positive parameters in mind, we cannot ignore the obvious spoilers. In the last few years, we have seen the safe haven premiums shared by the US dollar. Thus, a worsening economic or geopolitical situation in Ukraine or Taiwan could escalate the demand for safe haven, which could result in flows towards either gold or US dollar. If the investors choose the latter, it could lead to a correction in gold prices.

That said, current fundamental and technical indicators signal a revival in gold prices. From a technical perspective, if gold were to breach $1,750-1,760 levels, we could witness levels of $1,800. So adopting a buy-on-dips strategy is greatly recommended.

The author is Head-Commodities, HNI & NRI Acquisitions, Axis Securities

Disclaimer: The views and investment tips expressed by experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.​
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first published: Aug 1, 2022 02:43 pm
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