Gold declines as dollar recovers

Gurumurthy K | Updated on January 08, 2018

Sebastian Kaulitzki/   -  Sebastian Kaulitzki/

Bullish dollar index may keep the yellow metal under pressure in the short term

Gold fell sharply last week, giving back all the gains made the previous week. The global spot gold failed to sustain above the psychological $1,300 per ounce mark. It fell from its intra-week high of $1,306 on Monday to a low of $1,276.5 on Thursday. Though it managed to recover from this low, prices were pulled down sharply on Friday from around $1,291 on the back of the dollar gaining strength.

The dollar index got a boost on Friday with the US Senate approving the $4-trillion budget blueprint. This approval clears the way for the US government on its tax reform plans. The dollar index reversed about 0.7 per cent higher from its low of around 93 to end the week at 93.66. This reversal pulled gold prices lower on Friday to close the week 1.8 per cent lower at $1,280.5.

Silver touched a high of $17.47 per ounce initially and fell sharply to a low of $16.91. Similar to gold, the bounce-back from this intra-week low was short-lived, and prices fell again to close at $17 from $17.3, down 2.2 per cent for the week.

On the domestic front, both the gold and silver futures contract on the Multi Commodity Exchange (MCX) moved in tandem with global prices. The MCX-Gold reversed lower after making a high of ₹29,955 per 10 gm initially on Monday and closed at ₹29,554, down 1 per cent for the week. The MCX-Silver futures contract fell sharply from its high of ₹40,632 per kg to close the week 1.3 per cent lower at ₹39,877.

Watch the dollar

The dollar index may continue to influence bullion price movements in the short term. The European Central Bank (ECB) meeting on Thursday and the US GDP data on Friday might cause volatility in dollar movement this week which, in turn, may impact gold prices.

The US dollar index has been consolidating sideways between 93 and 94 over the last three weeks. A breakout on either side of 93 or 94 will decide the next move. The price action on the daily chart signals an inverted head and shoulder reversal pattern. This being a bullish pattern, it raises a strong possibility of the index breaking above 94 in the coming days. A strong break above 94 will increase the likelihood of the index rallying to 95 and 96 in the coming weeks. Such a rally may cap the upside in gold prices and keep it pressured on the downside.

Gold outlook

The global spot gold ($1,280.5 per ounce) has an immediate support at $1,276. A break below it can take it lower to $1,270 immediately. Further break below $1,270 will increase likelihood of the current fall extending to $1,259 thereafter. On the other hand, if gold manages to sustain above $1,276 in the coming days, it can bounce to $1,290 again.

If it manages to surpass $1,290, it can extend its upmove to $1,305. A strong break above $1,305 is needed for the downside pressure to ease. Such a break will increase the possibility of gold revisiting $1,325 and $1,350 levels.

The MCX-Gold (₹29,554 per 10 gm) has an immediate support at ₹29,520. The bias on the weekly chart is bearish. As such, the contract is more likely to break below ₹29,520 and fall to ₹29,300 or ₹29,200 in the coming days. The level of ₹29,200 is a strong support, which is likely to limit the downside in the short term. An upward reversal from there can take the contract higher to ₹29,500 and ₹30,000 levels again. An eventual break above ₹30,000 will then pave the way for the next target of ₹31,000 over the medium term.

Traders can hold the long position taken at ₹29,350 with a revised stop-loss at ₹29,500.

Silver outlook

The global spot silver ($17.1 per ounce) has an immediate support at $16.85. A break below it can take the prices lower to $16.50 initially. Further break below $16.5 can drag prices lower to $16.3, $16.2 or even $16 thereafter.

The MCX-Silver (₹39,877 per kg) futures contract has an immediate support at ₹39,725. If it manages to sustain above it, a range-bound move between ₹39,725 and ₹40,500 is possible for some time.

It will also raise strong possibility of the contract testing ₹41,000 thereafter. But if MCX-Silver breaks below ₹39,725, it can fall to ₹39,100 or ₹39,000. Further break below ₹39,000, can drag it to ₹38,700 or ₹38,400.

Published on October 22, 2017

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