Gold faces sideways trend amidst holiday lull and Fed Rate Cut Divergence; What should you do now?

By Bhavik Patel

It will be sideways market for gold as historically there is little volume in gold trades after Christmas and before New Year. The yellow metal stuck to a range between $2,000 and $2,050 an ounce seen over the past week. While dovish signals from the Fed helped the metal break above the $2,000 an ounce level, it struggled to make further gains as risk appetite improved and as traders second guessed expectations for early rate cuts from the Fed.

Many of the Fed members after recent FOMC meet have also given mixed signal stating that they are not looking at rate cuts soon. Several Fed officials warned that bets on an early rate cut from the central bank were overly optimistic, given that inflation is still trending well above the Fed’s 2% annual target. Market is already anticipating rate cut as early as March with 75% probability.

The current high price environment is likely to temper physical gold demand in India. Domestic gold consumption is foreseen to be primarily driven by the demand for bridal jewellery, with impulsive purchases of jewellery for everyday use likely to be limited. Compared to North America and Europe’s gold ETFs, Indian gold ETFs have seen sustained inflows since April. November saw inflows of US$47mn.

Weak demand in India can be seen by the price discount compared to International prices. As of mid-December, the local price discount – US$17/oz, was the steepest in over eight months. In the first half of December local dealers were offering discounts of US$ 12.7/oz10 (on average) from the official price compared with a premium of US$5/oz in the first half of October this year.

Buy on dips strategy continues to remain in place for gold as there aren’t any strong triggers for correction. We can see gold consolidating and trading in narrow range next week due to thin volume and holiday season. Expect range to be between 61550-63550 with bullish bias on every dip or correction.

(Bhavik Patel is a commodity and currency analyst at Tradebull Securities. Views expressed are the author’s own. Please consult your financial advisor before investing.)