Derivatives

Gold draws close to a hurdle

Rajalakshmi Nirmal | Updated on November 22, 2014

Dragon watch China's gold imports are key.

A crackdown on illegal gold financing deals in China will pressure prices in the short term

Spot gold prices ended the week at ₹28,086 per 10 gm in Ahmedabad, down 0.2 per cent for the week.

The rupee held its ground at around 60 to the dollar on continued purchases of the greenback by the central bank. This washed away hopes of traders who were long on gold futures.

On the MCX, the gold futures contract closed flat at ₹27,672 (for 10 gm).

In the international market, weak US economic data drove gold prices higher last week. The yellow metal hit a high of $1,325.9 per troy ounce on Thursday.

The US economy shrank by 2.9 per cent in the first quarter (January-March); much sharper than the previously estimated 1 per cent. The news made speculators book profits on gold as doubts rose about the ability to meet the Federal Reserve’s target of 2 per cent growth for 2014. Only the previous week, the Fed had reported that all was well and recovery was on track. What added fuel to the worries was a drop in consumer durable orders in May. US durable goods orders fell by 1 per cent in the month. The market expected an increase of 0.2-0.4 per cent. However, towards the weekend, as US consumer sentiment rose ignoring the weak GDP data, gold lost some of its gains. The index of consumer sentiment rose to 82.5 in June from 81.9 in May. Spot gold prices ended the week at $1,316.17 per troy ounce, up 0.1 per cent. Silver too was flat at $20.96 per ounce.

Platinum prices rose to $1,477.3 per ounce, up 1.4 per cent. The five-month long platinum miners’ strike in South Africa ended last week. The US dollar index, which measures the value of the greenback against major global currencies, fell to a low of 80.014 and ended the week at 80.039, down 0.4 per cent.

Physical market investors bought some gold last week. The US SPDR Gold Trust — the largest gold-backed exchange-traded gold fund in the world — saw holdings increase to 785.02 tonnes from 782.62 tonnes last week.

Cues to watch

This week there are not many key statistics to be released in the US. On Thursday, the weekly jobless claims data is due. The employment situation report will also be released the same day. On Friday, the markets are closed on account of US Independence Day.

Traders, however, need to be cautious. Through last week there was news that Iraq’s southern oilfields that produce most of the country’s oil remained unaffected by terror; developments need to be watched. Higher oil prices are a stress on corporate profits and will also push up inflation.

So, any shock from Iraq can stoke oil prices and see rising demand for gold as a haven. However, what may work to the disadvantage of gold bulls is the development in China. It has been found that gold has been used in numerous fake financing deals in China.

Experts say that if banks close these deals, the pledged gold will be sold in the market. This will put pressure on gold prices in the short term as China’s gold imports may drop — a worry because China is the world’s largest gold consumer. Already, the country’s gold imports (from Hong Kong) in May have been reported to be 20 per cent lower over a month earlier.

Domestic market

Gold futures on MCX ended flat at ₹27,672 for the week after moving to ₹27,870 on Tuesday. MCX silver futures ended marginally lower at ₹44,529 (per kg). Gold BeEs — the largest gold ETF in India — ended slightly lower at ₹2,600.9 a unit on Friday, without much change from the previous week’s close. On Friday the fund’s NAV was ₹2,617.42. With just 10 more days to go for the Budget, there could be volatility in the rupee. Gold prices, which have a negative correlation with the currency and stock market, may also turn volatile; so trade with strict stop losses. Volumes in gold futures contracts on the MCX have fallen again in June.

The total turnover in gold futures contract in the month was ₹86,738.5 crore, down 12 per cent from the previous month and 25 per cent lower than the average monthly turnover in the January-March period.

On the charts

The inability to break above the resistance of $1,326-1,330 raises doubts of the strength in the gold price rally. This week, if the price manages to move above this zone, it could extend the rally to $1,340/1,350. Else, there could be a correction to $1,300.

MCX gold may be range-bound this week and trade between ₹27,800 and ₹26,600. With a strong resistance at ₹28,000, the contract needs a weak rupee to help it rise further. The contract’s supports are at ₹27,450 and ₹26,600.

MCX silver lost steam last week. It should cut past ₹45,500 levels at least this week, to move further up. But it first has to get past the ₹45,000 level. The contract’s supports are at ₹44,100 and ₹43,000.

Published on June 29, 2014

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