Gold gains sheen on renewed US-China tiff

The ongoing sell-off in equities can boost the metal’s prices

It was a volatile week for gold. The global spot gold prices began the week on a stable note. But events in the second half of the week led to a volatile price movement. Prices tumbled to test $1,400 per ounce on Thursday, but managed to claw back and surge to a high of $1,450. The spot gold prices came off from the high and closed the week at $1,440.83 per ounce, up 1.5 per cent.

Two major events triggered the volatility. One, the Fed’s rate cut by 25 bps was widely expected by the market. But the Fed Chairman in his press conference indicating that the current rate cut is just a “mid-cycle adjustment” and there may not be further rate cuts, dashed the hopes of the market which had been expecting three rate cuts by the end of the year.

The Fed meeting outcome saw the US dollar index surging above 98 to test 99. As a result, gold tumbled from around $1,430 to test $1,400 and was threatening to decline below this psychological mark. But the impact of the Fed decision was short-lived. Trump’s decision on Thursday to levy fresh tariffs on Chinese goods, led to gold prices moving up again. The new tariffs on China triggered a sharp sell-off in global equities. Gold, in turn, rallied on a safe- haven bid and the price of the yellow metal surged to the week’s high of $1,450.

The renewed trade tensions between the US and China and the weakness in global equities may continue to aid gold prices.

Gold outlook

The near-term outlook is positive for gold. The global spot gold ($1,440.83 per ounce) has support in the $1,435-1,430 region. As long as gold trades above this support zone, a rise to $1,460 looks likely in the coming days. A break above the intermediate resistance at $1,450 can trigger this rise. A break above $1,460 will see the up-move extending to $1,470. Gold will come under pressure only on a sharp fall below $1,400, which looks less probable in the near term.

Silver underperforms

Silver prices failed to gain strength in tandem with gold. The global spot silver prices fell in the past week. The prices tumbled from around $16.60 per ounce to test $16 during the week. Silver has closed at $16.20 per ounce, down 1.2 per cent for the week.

The price action on the chart indicates that silver lacks strength to decisively breach $16.60. This leaves the near-term outlook negative for silver; a break below $16 and a fall to $15.75 or even lower in the coming days is possible. A strong break and a decisive close above $16.6 is needed to bring back the bullish momentum and take the prices higher to $17.

Rupee boost

The outcome of the US Federal Reserve meeting and the renewed trade tension between the US and China dragged the rupee sharply below 69 against the dollar last week. This helped the domestic gold and silver prices outperform the global prices.

The gold and silver futures contracts on the Multi Commodity Exchange (MCX) were up 2.3 per cent and 0.5 per cent, respectively. The MCX-Gold futures contract closed the week at ₹35,577 per 10 gm, and the MCX-Silver contract at ₹41,364 per kg.

Outlook

The short-term outlook for the MCX-Gold (₹35,577 per 10 gm) futures contract is bullish. The immediate resistance is at ₹35,800. A strong break above this hurdle will pave way for a fresh rally to ₹36,350-36,400 thereafter. But if the contract fails to breach ₹35,800, it can fall lower to ₹35,000 or ₹34,850 on profit-booking.

The MCX-Silver (₹41,364 per kg) has a strong support at ₹40,500 and ₹40,000, which has been holding well as of now. As long it trades above these supports, the outlook will remain bullish. A rise to ₹42,000 is likely in the near term. A break above ₹42,000 will increase the likelihood of the contract extending its up-move to ₹43,000 thereafter. An inability to breach ₹42,000 can keep the MCX-Silver futures contract in a broad ₹40,000-42,000 range for some time.

The writer is Chief Research Analyst at Kshitij Consultancy Services

Published on August 04, 2019
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