Will Putin put pressure on gold?

Rajalakshmi Nirmal | Updated on March 09, 2014

Gold prices rallied to a four-month high at $1,354.8/ounce last week as tensions escalated between the US and Russia over Ukraine. However, it settled at $1,339.9/ounce for the week, trimming initial gains on strong economic data from the US. It ended the week up hardly 1 per cent.

Economic numbers from the US last week eroded much of the gains of gold and silver. The Institute for Supply Management reported last week that the manufacturing sector expanded in February. The PMI showed a reading of 53.2 per cent against January’s 51.3 per cent. Also, the weekly claims for jobless benefits dropped to a three-month low and the US economy added 175,000 jobs in February.

Earlier last week, gold prices got a boost from the sell-off in the US dollar. This followed the European Central Bank leaving interest rates untouched in its meeting and President Mario Draghi saying the bank expects economic recovery to continue. The euro hit a high of $1.3915 against the US dollar during the week and closed at $1.3875.

The winners last week were actually the platinum group metals. Fears that sanctions on Russia could hit supply of the precious industrial metals saw investors chasing them, driving prices higher. Platinum rose 2.5 per cent to $1,482.5/ounce. Palladium, too, rallied sharply to end the week at $781.6/ounce. Last week, talks between South Africa’s top platinum miners and their labour groups failed, increasing the threat of reduced supply. News of the US mint resuming sales of the American Eagle platinum coin on demand also helped push prices higher. Silver prices that were upbeat initially closed 1 per cent lower for the week at $20.94/ounce.

Domestic market

Gold prices in India still continue to trade at 5-6 per cent premium to international price. Dealers say the premium may continue till restrictions on gold imports remain. In India, gold prices are fixed by the industry body. These prices are not based on virtual order books or computer generated buy/sell bids. They are fixed by a few big dealers who arrive at a price depending on the orders they receive. Lack of transparency makes the prices move ₹100-300 higher or lower for little reason. London gold benchmark prices (which are used to determine gold prices globally) are also fixed the same way. Last week, a New York resident filed a lawsuit against the bankers for colluding to manipulate the London gold fix prices. Gold futures on the Multi Commodity Exchange closed the week at ₹30,130/10 gm, up barely 0.1 per cent. Silver futures ended 0.3 per cent lower at ₹46,205/100 gm. Gains were muted as the rupee strengthened against the greenback last week. The rupee gained 1 per cent and ended at 61.08 versus the dollar. The gain in the rupee followed improved current account deficit numbers.

Cues to watch

Gold prices might retract on profit-booking by investors if tensions in Crimea ease next week. But, note that some concerns of last year that drove gold down 28 per cent, have eased and there is room for a price upside in the medium term. Investors have started to hoard gold again. The SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, which started the year with a holding of 798.22 tonnes, holds 805.2 tonnes of gold now. Also, the improving situation on the balance of payments in India is a signal that restrictions on gold imports could be lifted soon.

The yellow metal may also have new takers. A solar panel producer in China has defaulted on interest payments on its bond on Friday. With the Government not chipping in to bail out the company, Chinese investors are getting anxious about more cases of default in the bond market. Next week, along with the developments in Ukraine, the market would also closely follow the US jobless claim numbers on Thursday. On the same day, retail sales and the Bloomberg Consumer Comfort index will be released. On Friday, the Producer Price Index that measures the change in price received by domestic producers of goods and services will be announced. Prices will, however, be only volatile till the US Federal Reserve’s meeting on March 19.

The gold chart remains in the favour of bulls. The $1,354/ounce level hit on Monday is the immediate resistance for the metal. If this level is breached, the next target is $1,360. Beyond this, the next level is high up at $1,433. However, a pullback next week cannot be ruled out. The support level is $1,314.

Reading the charts

MCX Gold futures have to firmly move above ₹30,500 levels for the medium-term trend to turn positive. Next week, targets on the lower side are ₹29,635 and ₹29,500. Resistance is at ₹30,748 and ₹31,574. MCX Silver, too, needs to break above ₹47,000 levels. Till then, there will only be sideways movements. Support is at ₹45,692 and ₹45,200 and resistance at ₹48,000 and ₹49,112.

Published on March 09, 2014

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