Derivatives

Gold rises on inflation fears

Rajalakshmi Nirmal | Updated on November 22, 2014

BL03_THAI-GOLD

Weak rupee and the haven demand following crisis in Iraq may keep gold prices up in the short term



Gold prices in India continued their strong surge. The MCX spot gold index rallied 4 per cent for the week ended June 20.

Strong international prices, plus a weak rupee, helped the metal. Though the rupee has been gaining against the dollar, the rally in crude oil prices last week pulled it lower.

Spot prices of the yellow metal in the international market rose by 3 per cent and ended at $1,314.8 per troy ounce after the US Federal Reserve’s dovish stance on interest rates. Silver prices ended at $20.87, up 6 per cent. Platinum prices too rose and ended at $1,456.8, up 1.6 per cent. Though the Fed Reserve reduced its bond purchases by another $10 billion (to $35 billion), it left interest rates unchanged.

This led to speculation of a rise in inflation, sending gold bulls on a rampage. The US Dollar index slipped from 80.50 to 80.37 on Friday. However, SPDR Gold Trust — the world’s largest gold backed ETF — continued to see outflows and failed to garner investor interest. The fund’s holdings dropped from 787.08 tonnes in the beginning of the week to 782.62 tonnes on Friday.

China’s Gold Association said on Thursday that the country’s gold consumption may be flat to negative in the current year. It is reported that though gold jewellery consumption may continue to be robust in China, gold bar demand will be sharply lower.

Domestic market

The MCX gold futures contract rose 4 per cent to ₹27,668 (for 10 gram) last week. MCX silver futures rallied 6 per cent higher to end at ₹44,570 (for 1 kg). The rally in bullion prices was supported by a weak rupee. The currency slipped from 59.85 against the dollar to 60.18 last week.

Higher crude oil prices in the international market stoked fear of increase in inflation and higher CAD. With the Government increasing railway passenger fares and freight charges last week, analysts worry that inflation could rise further. A weak rupee will bolster returns on gold.

According to industry sources, the Government can cut import duty on gold in the upcoming Budget by 2-4 per cent.

If import duties on gold drop, it will bring down landed price of gold in the country. This will see the metal’s future contract prices also adjust accordingly. You can, therefore, book profit on your short position towards the Budget.

Cues from the US

This week will be packed with data releases in the US. On Tuesday, the data on new home sales is out. On June 25, durable goods order and GDP data (for the first quarter) are expected. Thursday will see the weekly jobless claim data release. Traders with short positions in gold need to keep an eye on developments in Iraq. If tensions rise, safe haven demand for gold will rise. The US Federal Reserve in its meeting last week reduced its growth estimates for the economy from 2.8 to 3 per cent to between 2.1 and 2.3 per cent. So, the market is already bracing for lower growth and higher inflation in the US which can bring back the lost demand for gold — the classic safe haven.

On the chart

The sharp rally in gold prices past the psychological mark of $1,300 per troy ounce is a bullish signal. This opens up the possibility of the price moving higher to $1,340 and $1,350 this week.

MCX gold (₹27,668) may continue to rise too. The targets on the upside are ₹28,000 and ₹28,700. If the rupee shows some strength against the greenback the contract may drop to ₹26,600 and ₹25,800.

MCX silver (₹44,570) saw a very sharp pullback last week. The short-term trend is now positive. If the contract manages to cut past ₹45,500, then it can go even to ₹46,700. The support levels are ₹43,000 and ₹41,700.

Published on June 22, 2014

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