Derivatives

Gold begins to glitter

Rajalakshmi Nirmal | Updated on January 19, 2018

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Yellow metal up 17 per cent year-to-date for Indian investors on global recession worries

It looks like exciting times are back for gold investors. The big gold bears in the market were caught unawares last week as gold surged to a high of $1,263.5/ounce on Thursday. It ended the week at $1,237.9/ounce, up 5.4 per cent for the week and 15 per cent on a year-to-date basis for 2016.

Silver and platinum rallied about 5 per cent each and closed at $15.7/ounce and $955/ounce, respectively.

Investors rushed to buy units of SPDR Gold Trust (the largest gold backed exchange traded fund in the world). ETF holdings increased by 12 tonnes over the week, all thanks to a weak dollar.

The US Dollar Index was down more than one per cent last week, closing at 95.94. Year-to-date, it is now down 2 per cent. CFTC data shows net long positions in the dollar have declined in recent weeks, reflecting fewer positions from speculators and hedge funds.

In the December quarter, US GDP growth was a mere 0.7 per cent, down from 2 per cent in September. Recent data showed that US exports shrank by 5 per cent in the year 2015, the first such shrinkage after 2009. The strong dollar (it rallied to a 13-year-high against a basket of currencies in 2015) probably dented exports. Janet Yellen, in her remarks last week, noted that the US revival could face risks from a weakening global economy.

After the Fed increased rates by 25 basis points in December 2015, markets had built in expectations for four hikes mote hikes, as indicated by the Fed, by end 2016. But this appears to be difficult now. With the Bank of Japan moving to negative interest rates and the ECB signalling a new round of stimulus in March, it may be difficult for the Fed to take the opposite road to continue with its rate hikes.

Some experts, in fact, are now hinting at a rate cut from the Fed, with possibilities of the US stepping into recession this year. The CME Fed watch tool (which is based on fed fund futures price that measures probability of rate hikes) last week indicated just a negative 6 per cent chance for a rate hike in March. It doesn’t see rates rising until at least February 2018.

Receding rate hike expectations, combined with recession fears and the concerted fall in global equities have helped prop up gold last week.

Cues to watch

There are several key data releases in the US this week. Monday being a holiday, it starts with housing market index on Tuesday followed by housing starts, industrial production and FOMC minutes (of the January meeting) on Wednesday, jobless claims on Thursday and consumer price index on Friday.

US industrial production is expected to have grown in January — the first time in five months. Inflation, however, may have dropped in the last month.

This week, gold market moves will depend on whether stability returns to the equity markets as well as the US dollar.

If equity markets are in better spirits and fears of a recession fade, then the metal may see some profit booking. In the US, some big names, including Walmart, have their earnings due for release.

Supports for gold in the global market are at $1,200 and $1,150. At the higher end, $1,250 will act as the resistance. But if the metal doesn’t slide much and is able to hold above $1,200, it can re-test $1,263. The next target then would be $1,280/ounce.

Rupee adds shine

Indian gold investors were an even happier lot, as a weak rupee helped them get better returns on the metal. Gold prices (999 purity) in the spot market on Friday were at ₹2,930.5/gram, up 7 per cent for the week and 17 per cent, year-to-date.

Rupee closed at 68.2 against the US dollar, down from 67.65 a week ago.

Gold and silver futures contract thus did extremely well. MCX Gold futures contract hit a high of ₹30,095 and closed at ₹29,386, up 6 per cent for the week. MCX Silver futures contract closed at ₹37,984, also up by per cent for the week.

MCX gold futures have a strong resistance at ₹30,000 levels. If this is crossed, the contract would target ₹31,000 levels. Supports are at ₹29,000 and ₹28,000. MCX Silver futures needs a strong momentum to re-test highs of the last week at 38,800 levels. If there is any negative news flow, it may easily again go below ₹35000.

Published on February 14, 2016

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