Commodity Analysis

Bullion Cues: Gold snaps three-week rally

Gurumurthy K | Updated on March 10, 2018 Published on September 17, 2017

PO18_Gold_chart

Major central banks’ plans to tighten monetary policy weigh on gold

Three weeks of a continuous rally in gold prices halted last week. Global spot gold opened the week with a gap-down and was broadly range-bound between $1,315 and $1,340 per ounce. The yellow metal closed the week at $1,320, down 2 per cent. Neither North Korea’s missile test nor the terror attack in the UK aided bullion prices.

Silver, after trading in a sideways range for most part of the week, fell sharply over one per cent on Friday. Global spot silver prices closed at $17.59 per ounce, down 2.1 per cent for the week.

On the domestic front, both gold and silver futures contracts on the Multi Commodity Exchange (MCX) moved in tandem with global spot prices last week. The MCX-gold contract fell 1.4 per cent to close the week at ₹29,856 per 10 gm. The MCX-Silver contractclosed at ₹40,814 per kg and was down 1.8 per cent for the week.

Central banks weigh in

The European Central Bank (ECB) in the first week of this month had said that the decision on tapering its stimulus programme would most likely be taken in October. Following this, it was the Bank of England’s (BoE) turn last week to signal the market on enhanced prospects of a rate hike. After these two major events, the market is now keen to watch what the US Federal Reserve is going to do at its meeting this week on Wednesday.

Eyes on the Fed

US Consumer Price Index (CPI) data release last week showed that inflation has inched higher to 1.9 per cent in August (year-on-year) from 1.7 per cent the previous month. The expectation of another rate hike from the US Fed this week has increased after the inflation data last week.

Prices of the yellow metal may remain subdued until the outcome of this week’s US Fed meeting is known. Major global central banks like the ECB and BoE inching closer to joining the US Fed on policy tightening has weighed on gold prices.

The ongoing geo-political tensions will continue to remain a factor in limiting the downside for gold prices although they did not impact prices much last week.

The second factor that looks supportive for gold prices is the weak dollar index. The index rose to a high of 92.66 and came off from there to close at 91.85. Technically, the 200-week moving average resistance capped the upside last week and pushed the index lower. Strong resistance between 92.40 and 92.60 is holding well as of now. As long as the index stays below this resistance zone, a fall breaking below 91 targeting 90.30 cannot be ruled out in the coming weeks. Such a fall in the dollar index may help push gold prices higher again.

Gold outlook

Global spot gold ($1,320 per ounce) prices have immediate supports at $1,316 and $1,312 which are likely to be tested this week.

A break below $1,312, which cannot be ruled out, can drag the yellow metal lower to $1,298. A key trendline and the 38.2 per cent Fibonacci retracement supports are poised at $1,298 and $1,299. As such, a fall below $1,298 is less likely. Also, fresh buying interest may emerge around the psychological support level of $1,300. As such, an eventual upward reversal from the $1,300-$1,298 support zone can boost momentum. In such a scenario, gold prices can move up to $1,340 and $1,350 levels again.

MCX-Gold (₹29,856 per 10 gm) is hovering in a sideways range above the ₹29,800-₹29,700 support zone. If the contract declines below ₹29,700, it can fall to ₹29,350. This level of ₹29,350 is a significant support which is likely to halt the fall. A strong bounce-back from this support can take the contract higher to ₹30,000 or even higher levels thereafter.

Silver outlook

Global spot silver ($17.59 per ounce) has immediate support at $17.50. If it manages to sustain above this support, a bounce to $17.75 and $18 is possible.

A range-bound move between $17.5 and $18 can be seen for some time. But if silver breaks below $17.5 in the coming days, it can fall to $17.35 or $17.30 initially. Further break below $17.3 can drag it to $17.1 and $17 thereafter.

On the domestic front, MCX-Silver (₹40,814 per kg) futures contract looks much weaker than the MCX-Gold contract. The MCX-Silver contract can fall to ₹40,200 or ₹40,100 in the near-term. However, the possibility of the contract declining further below ₹40,100 is low. A strong upward reversal from ₹40,100 can take the contract higher to ₹41,200 and ₹41,500 initially. A break above ₹41,500 will see a revisit of ₹42,000 levels.

Published on September 17, 2017

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