Panic in financial markets can support gold

Gold proved its mettle as a haven last week, holding relatively steady even as equity, currency and bond markets experienced a tumultuous time. Gold prices did experience intense intra-day volatility but the loss for the week was limited to 2 per cent.

Silver and platinum could not weather the volatility as well as the yellow metal. Silver lost 3 per cent and platinum closed 5 per cent lower. Surprisingly, international gold prices spiked immediately after the Federal Reserve announced a further $10-billion cut in its bond repurchase programme. But the intra-day rally did not sustain.

Prices headed lower once again as investors assimilated the statement of the Fed that cited the improving prospects of the US economy as the major reason for the continuation of the taper.

Reduced liquidity owing to the accelerated taper and the Indian government’s flip-flop on rolling back restraints on gold imports, are also not conducive to gold prices. But the ongoing turmoil in the emerging equity and currencies market is preventing a sharper slide in the yellow metal.

As risk-aversion heightens, investors typically turn to gold and the US treasury instruments to park their funds.

Investment demand for gold revived slightly with SPDR gold trust holding increasing by 3 tonnes.Weakness in the US and European equity market can support gold prices in the coming week. The much-awaited correction has begun in the US markets, with the Dow Jones Industrial Average and the Nasdaq closing on a weak note in January.

European markets too have started to trend lower after the Euro Zone inflation for January came in lower than expected. This has raised expectations of a policy rate cut by the European Central Bank next week.

This can take the US dollar higher which does not augur well for gold. The dollar index that tracks the movement of the dollar against a basket of currencies spiked higher to 81.1. This index gained 1.1 per cent last week. In India, despite a 25 basis points repo-rate hike, the rupee has not lost much ground and has ended the week on a flat note. The resumption of the debate on raising US debt ceiling next week can also bring in some uncertainty, which can help gold prices.

MCX gold futures crawled up to the intra-week high of ₹29,840 on Wednesday. But it lost ground thereafter to end the week at ₹29,462. MCX silver futures lost ground and closed at ₹43,250. NCDEX’s new product — the gold hedge contract — reported moderate volumes.

A chat with brokerages such as Nirmal Bang, India Infoline and Angel Broking reveals that there is lot of enthusiasm among traders for this contract. As it reflects international price of gold with no tax-related distortion, the outgo on charges including CTT, STT and brokerage is lower for a trader. Gold hedge contracts are available in lots of 100 gm and one kg.

International spot gold prices are once again attempting to reverse higher from the strong support at $1,180. But it is too soon to infer that the short-term trend has reversed higher.

Gold prices face strong hurdle at $1,278. As long as this level is not breached, the possibility of a decline to the low at $1,180 remains open. Move above $1,278 will take the price to $1,308 or $1,339.

The long and medium-term trends for international gold prices are also down. A strong close above $1,433 is required to signal that the yellow metal is on the road to sustainable recovery.

The trend in international silver prices is weaker than that of gold. Silver was unable to get to the short-term resistance at $21.2 and is reversing from the $20.3-level. This implies that silver can crack down to $18.2 or $17.5 in the near term.

The zone between $17 and $17.5 is likely to provide support to silver in the medium-term.

MCX gold futures are pausing close to key short-term resistance at ₹29,920.

Traders should not initiate fresh long positions unless this level is crossed. Conversely, reversal from these levels can pull the futures lower to ₹28,962 or ₹28,752. Target on decline below ₹28,752 is ₹28,075.

Short-term trend in MCX silver futures is also down. But the contract has immediate support at ₹42,420.

Fresh short positions are advised if this level is breached. Subsequent targets are ₹40,920 and ₹38,536. Resistances are at ₹45,740 or ₹49,239.

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