Gold bounces from key long-term support

Gurumurthy K | Updated on July 09, 2018

This is an early indication that the current downtrend could end soon

Gold fell in the initial part of last week. However, the crucial support at $1,238 per ounce halted the fall as expected, and has triggered an upward reversal. The global spot gold prices bottomed at $1,237.98 per ounce and bounced from there to record an intra-week high of $1,261. The prices came off slightly from this high to close the week at $1,255 per ounce.

The price action in the coming weeks will be crucial and will need a close watch. If gold manages to sustain above $1,238, it could mark the end of the downtrend that has been in place since April. A strong rise past the $1,270-1,275 resistance zone will confirm the trend reversal.

On the domestic front, the gold futures contract on the Multi Commodity Exchange moved in tandem with the global spot prices. The MCX-Gold futures contract has closed the week at ₹30,560 per 10 g, up 0.42 per cent for the week.

Weak dollar

Weakness in the US dollar helped gold recover from the week’s low of $1,238. The dollar index fell over a per cent from its intra-week high of 95.14 and closed at 93.96. The price action on the chart leaves the bias bearish. Resistance for the index is at 94.5 which is likely to cap the upside in the near term.

A fall to 93.2 or even 92.8 is possible in the coming days. A further break below 92.8 will then increase the likelihood of the index extending its fall to 92.5 or even 92 thereafter. Such a fall in the dollar index can push gold prices further high in the coming weeks.

Trade war to support

The trade war between the US and China has been keeping the dollar under pressure. The 25 per cent tariff on Chinese imports into the US came come into effect from Friday. China also retaliated with tariffs on imports of US goods. This has already been largely priced in the market. However, further escalation in the trade war between the US and other countries might trigger fresh fears in the market. In that case, the US dollar would be beaten down, which in turn can help gold regain the safe-haven status. As such, concerns of the on-going trade war could turn out to be a positive for gold price in the coming days.

Gold outlook

The bounce in the global spot gold ($1,255 per ounce) in the past week, from the crucial long-term trend support level of $1,238 is technically significant. This gives an early sign of an end to the downtrend that has been in place since April. Immediate resistance is at $1,261. While below this hurdle, a fall to $1,245 or $1,240 is possible again. A range-bound move between $1,240 and $1,260 can be seen for some time in such a scenario. On the other hand, a strong break above $1,260 will give a breather to gold and take the prices higher to $1,270. The region between $1,270 and $1,275 is a crucial resistance zone. Gold has to decisively breach $1,275 to confirm a trend reversal. A strong break above $1,275 will boost the momentum and pave way for the yellow metal to revisit $1,300 levels in the coming weeks.

The spot gold prices will come under pressure only if it decisively breaks below $1,238. The next targets are $1,225 and $1,200. But such a strong fall breaking below $1,238 looks less probable at the moment.

The outlook for the MCX-Gold (₹30,560 per 10 g) is mixed. Resistance is at ₹30,850 and support is at ₹30,150.

A range-bounce move between ₹30,150 and ₹30,850 can be seen for some time. However, the bias will remain positive for the contract to break this range above ₹30,850. Such a break will take the contract higher to ₹31,200 and ₹31,500 in the short term. The contract will come under pressure if it declines below ₹31,150. The ensuing targets on a fall below ₹31,150 are ₹29,850 and ₹29,600.

Silver: Mixed signals

The global spot silver prices underperformed in the past week compared with gold. The prices have closed 0.44 per cent lower at $16.04 per ounce last week.

Silver has an immediate support at $15.90 and resistance at $16.20.

A breakout on either side of $15.9 or $16.2 will decide the next trend. If silver manages to breach $16.20 decisively, the downside pressure would ease. An up-move to $16.4 and $16.5 is possible in that case. On the other hand, if silver declines below $15.9, it will come under more pressure. Such a break can drag it to $15.60.

MCX-Silver outperforms

The silver futures contract on the MCX outperformed by surging about 1.4 per cent. The contract initially fell n the past week, but managed to reverse sharply higher after making a low of ₹38,560 per kg. The contract has the week at ₹39,766 per kg. Strong support for the contract in the ₹39,350-₹39,300 region is likely to limit the downside in the near term.

Intermediate dips to this support zone may find fresh buyers coming into the market. As long as the contract remains above ₹39,300, the outlook will be positive and an upmove to test the immediate resistance at ₹40,300 is possible in the near term.

A strong break above ₹40,300 will boost the momentum and will take the contract further higher to ₹41,000 thereafter.

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Published on July 08, 2018
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