Deep correction eyes over-bought gold once geopolitical concerns ease
ISLAMABAD
Gold price surged for the third consecutive week to the level seen for the first time in eight months as metals markets jumped on inflation data and geopolitical concerns centring on Russia.
Gold futures closed the week on a bullish note in international market at $1,899.20 per ounce, with a massive $40.20 (+2.16 percent) gain on a week-on-week basis, because the yellow metal is coming sharply to the upside as a “safe haven” asset based on the latest US-Russia tensions.
The price of 10 grams of 24-carat yellow metal in Pakistan, meanwhile, increased 2.39 percent to Rs107,000 from Rs104,500 during the last week. The Pakistani rupee depreciated 0.66 percent against the US dollar last week, which also impacted local gold prices negatively.
Gold breached the $1,900 level for the first time since June 2021 before settling lower, with risk flows cooling off on reports claiming additional Russian troops were moving to the Ukrainian border. The 10-year US Treasury-bond yield shed more than 3 percent last week, helping gold gain traction. Higher inflation was also one of the reasons for higher prices.
Geopolitics is likely to remain the primary market driver next week.
However, gold could find it difficult to extend its rally in the coming week, as it is possible that the latest bout of Russia fear-mongering will once again turn out to be overblown. Moreover, Relative Strength Index (RSI) also suggests that bulls may slow down for a correction.
Gold started last week on a firm footing as US National Security Adviser Jake Sullivan said that Russia could invade Ukraine before February 20. Markets turned risk-averse and gold registered strong daily gains on Monday, as investors sought refuge over heightened fears of a Russian invasion. Though reports that Russian troops started to return to bases caused the yellow metal to lose interest as a safe haven on Tuesday, it managed to regain traction in the second half of the week and breached the $1,900 level for the first time since June 2021.
In the week starting today (Monday), a de-escalation of Russia-Ukraine tensions could trigger a risk rally and cause gold to come under heavy selling pressure. On the other hand, a prolonged threat of a Russian invasion could provide another boost to gold by forcing investors to stay away from risk-sensitive assets.
From a technical perspective, gold needs to rise above the $1,900 psychological level in order to extend its rally. The next levels of resistance are $1,910 and $1,925.
On the flip side, the RSI indicator on the daily chart is now above 70, pointing to overbought conditions, which may set the stage for a deep correction. The support levels for the gold will be $1,870, $1,850 and $1,838.
