Escalating tensions in Ukraine and Israel to bring back haven demand for gold

Spot gold prices in the country dropped last week following trends in the international market. At ₹2,809 per gm, the price of 24-carat gold was down 1.4 per cent.

The weak rupee didn’t help hold gold prices. The rupee edged lower from 59.94 against the US dollar a week earlier to 60.23 on Friday on higher demand for the greenback.

The dollar index inched up from 80.187 in the previous week to 80.524 on Friday.

In the international market, spot gold prices dropped two per cent to $1310.8 per troy ounce. The metal touched a high of $1324.7 on Friday but came off the peaks soon on profit booking. News of the shooting down of a Malaysian Airlines plane in Ukraine increased geopolitical tensions and helped gold — a classic haven — to edge up. However, the sharper drop in price in the initial part of the week on fears of an early increase in interest rates in the US made gold close in the negative zone for the week.

The US factory output in the June quarter rose by 6.7 per cent — the fastest pace in two years. Also, the number of US citizens claiming for jobless benefits dropped by 3,000 to 3,02,000 for the week ending July 12, boosting investor confidence in the US recovery. The only damp report last week was from the housing sector. The US housing starts fell unexpectedly by 9.3 per cent in June.

Investors in the physical market continued to buy more gold. The holdings of the SPDR Gold Trust, the largest gold backed exchange traded fund, increased from 800.05 tones in the previous week to 805.14 tonnes by Friday.

Silver prices in the spot market ended the week 2.7 per cent lower at $20.87 per ounce. Platinum prices closed at $1489.3 per ounce, down 1.5 per cent.

Global cues

The coming weeks may see gold demand edge up on geo-political tensions. With Russian rebels bringing down a Malaysian plane that was flying over Ukraine, the US may now impose more severe sanctions on Russia. Conflict is also escalating in West Asia with Hamas militants firing into Israel. Traders need to be cautious with their short positions this week. On Tuesday is the release of the US Consumer Price Index and existing home sales data. Thursday will see the release of the weekly US jobless claims report and new home sales data.

Domestic signals

Gold futures on MCX closed the week at ₹27,993 (per 10 gram), down 1.3 per cent. MCX Silver futures dropped 2.5 per cent to ₹44,931 per kg. The rupee lost sheen and slid to 60.29 against the US dollar as the greenback gained strength.

Dollar strengthened on haven demand following the increase in tensions in Ukraine. If both the Ukraine and Israel issues escalate in the coming weeks, the rupee may face pressure on the risk of oil prices going up. A weak rupee will push domestic gold prices up.

India’s trade deficit in June ballooned to $11.76 billion — the highest since July last year after a 65 per cent increase in gold imports. Recently, the RBI relaxed some norms on gold imports.

This trend is not good news for gold traders who have been lobbying for relaxation in 80:20 rule. With oil price inflation a key risk in the short term, the government may not remove the restrictions on gold imports for now.

On the charts

Gold prices in the international market may remain range-bound in the short term. Gold’s attempts to move to $1,350 have not fructified in recent weeks. Only if it gains momentum to cross $1,350 levels will the trend turn positive. But now that the Ukraine issue has again come to the front burner, there is a possibility of sharp upsides.

MCX gold futures may test levels of ₹28,280 and ₹28,400 this week. On the downside, levels are ₹27,700 and ₹27,500. If these two levels are cut, the next target will be ₹27,100.

MCX Silver futures couldn’t hold above ₹46,000 levels and turned weak. Now, it is likely that the contract will remain in the range between ₹44,300 and ₹45,800 for some time. Upside target is ₹45,800. However if weakness persists, it may move to ₹44,500 and ₹44,300.

(This article was published on July 20, 2014)
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