Commodity Analysis

Gold bounces from a crucial support

Gurumurthy K | Updated on November 18, 2018 Published on November 18, 2018

Weakness in dollar helps the yellow metal regain strength

Gold began the previous week on a negative note and later fell, breaking below the psychological level of $1,200 per ounce. But the threat of a further sharp fall was short-lived as the yellow metal managed to reverse high after making a low of $1,196, and sustained the momentum all through the week thereafter. The global spot gold prices closed at $1,223 per ounce, up 1.2 per cent for the week.

The sharp fall in the US dollar index aided gold to claw back from the week’s low. The US dollar index began the week on a strong note by breaching the key resistance level of 97.15 but failed to sustain higher.

The fall intensified on Friday after two US Federal Reserve officials indicated a possible slowdown in the global economy. One of them hinted that the Fed was nearing its desired neutral rate. The officials’ comments increased the speculation in the market that the Fed may slow down the pace of rate hike going forward, or may even pause for a while. This dragged the US dollar index sharply below 97 on Friday. The index closed the week at 96.46.

Risk aversion in the market also gave support to gold. Increasing uncertainty and concerns over a harder Brexit after the resignation of a few UK Cabinet ministers last week supported gold as it is considered a safe haven during uncertainty.

On the domestic front, the strength in the rupee is continuing to play spoilsport. The MCX-Gold futures contract tumbled to a low of ₹30,605 per 10 gm. Though the contract managed to reverse high from the lows, the strength in the rupee limited the pace of the bounce-back. The MCX-Gold futures contract closed the week on a flat note at ₹30,007 per 10 gm.

Dollar outlook

The US dollar index (96.46) has a near-term support at 96.2. A break below it can take it lower to 96 and 95.7. Such a fall will aid gold to move further higher.

Resistances for the index are at 96.7 and 97.1. The outlook will turn positive only if the index decisively breaks above 97.1 again. Such a break will then pave the way for the next targets of 98 and 98.2.

The gold-silver ratio is getting closer to a crucial resistance level of 87. The index made a high of 86.2 and came off from there to close the week at 84.5. A strong downward reversal from 87 may take the index initially lower to 80 and 78. A further break below 78 can drag it to 75.

This is a positive signal for bullion prices. The possible fall in the ratio indicates that bullion prices are likely to surge from a long-term perspective with silver outperforming gold.

Gold outlook

The support in the $1,197-1,196 region held well last week. The global spot gold ($1,223 per ounce) reversed sharply after testing this support zone last week. Near-term supports are at $1,213 and $1,210. As long as gold remains above these supports, $1,235 and $1,237 is possible in the coming days. The upmove will get negated if it breaks below $1,210. The next targets are $1,205 and $1,200. However, the outlook will turn negative only if gold breaks below $1,296 decisively. But such a strong move looks less probable at the moment.

On the domestic front, the MCX-Gold (₹31,007 per 10 gm) futures contract extended its downmove, as expected, last week. However, the contract has bounced from its low of ₹30,605. The short-term outlook is mixed for the contract. A cluster of supports are poised in the broad ₹30,500-30,000 region.

Similarly, key resistances are poised in the ₹31,300-31,500 region. The contract may oscillate in a broad sideways range between ₹30,000 and ₹31,500 in the coming weeks. A breakout on either side of ₹30,000 or ₹31,500 will determine the direction of the next move. Traders can stay on the sidelines until a clear trend emerges.

Silver outlook

The global spot silver prices reversed sharply high last week after making a low of $13.89 per ounce. The price action on the chart indicates that silver is lacking strong selling interest to drag it decisively below the psychological level of $14. In turn, it is getting fresh buyers around $14. Silver has closed the week at $14.42 per ounce.

Support for silver is in the $14.25-14.20 region. An upmove to $14.5 is likely in the near term. A strong break above $14.5 will take the prices further higher to $14.70 and $14.75 over the short term.

On the domestic front, the MCX-Silver (₹36,991 per kg) reversed sharply high from the week’s low of ₹36,036. Significant support is in the ₹36,000-35,800 region, which is likely to hold well and limit the downside. As long as the contract trades above this support zone, there is a strong likelihood of it rallying to ₹38,000 in the coming days. A further break above ₹38,000 will then increase the likelihood of the contract extending its rally to ₹38,500 and ₹39,000 again. On the other hand, if the contract breaks below ₹35,800, the downmove can extend to ₹35,250.

Trading strategy

Traders with a medium-term perspective can go long on dips at ₹36,600, ₹36,100 and ₹35,850. Stop-loss can be placed at ₹35,100 for the target of ₹38,700. Revise the stop-loss higher to ₹37,150 as soon as the contract moves up to ₹37,950.

Published on November 18, 2018
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