Commodity Analysis

Gold gets a breather on short-covering

Gurumurthy K | Updated on April 28, 2019 Published on April 28, 2019

Representative image   -  Getty Images/iStockphoto

But the upside will be capped, and the downtrend is likely to resume thereafter

Gold fell in the initial part of last week, but managed to bounce back in the second half of the week. The global spot gold price fell, breaking below $1,270 per ounce, and made a low of $1,266. However, the yellow metal reversed sharply higher from this low and surged to a high of $1,288 before closing the week at $1,286 per ounce, up 0.8 per cent.

Silver, on the other hand, remained relatively stable. The global spot silver prices fell to a low of $14.75 per ounce and bounced sharply from there, recovering all the loss. Silver closed the week at $15.08 per ounce.

The rally in the global equities kept gold prices stalled last week. This helped the yellow metal bounce back. Gold rallied last week inspite of a strong surge in the US dollar index.

Dollar rallies

The US dollar index has risen, breaking above the crucial resistance level of 97.75. The index came off after making a high of 98.33. However, the outlook remains bullish. The level of 97.75 will now act as a strong support and limit the downside. The dollar index is likely to rise towards 98.75 and 99 in the coming days. Such a rally in the dollar index can cap the upside in gold and trigger a reversal again.

Weak rupee

On the domestic front, weakness in the rupee helped the gold and silver futures contract on the Multi Commodity Exchange to outperform the global prices. The MCX-Gold futures contract closed the week at ₹31,939 per 10 gm and was up 1.5 per cent. The MCX-Silver futures contract was up 0.8 per cent and closed at ₹37,518 per kg. The rupee weakening against the US dollar and falling below 70 last week helped the MCX contract outperform global gold prices.

Gold outlook

The strong bounce from $1,266 and a decisive close above $1,280 has eased the downside pressure slightly. The global spot gold ($1,286 per ounce) has immediate support in the $1,282-1,280 region. As long as it sustains above this support zone, there is a strong likelihood of gold moving further higher to $1,292 or even $1,295. However, the broader view continues to remain negative. The upside is likely to be capped at $1,295. As such, gold can reverse lower again from the $1,292-1,295 resistance region and can fall back to $1,280 again.

The MCX-Gold (₹31,939 per 10 gm) is continuing to get support near ₹31,400. The contract has been broadly range-bound between ₹31,400 and ₹32,500 for more than a month. Within this range, the near-term outlook is positive for a rise to ₹32,300. A break above ₹32,300 will see the up-move extending to ₹32,500. A breakout on either side of ₹31,400 or ₹32,500 will decide the direction of the next move.

Silver outlook

The global spot silver ($15.08 per ounce) bounced from a crucial $14.80-14.75 support zone last week. However, a key resistance is near current levels at $15.10. Whether silver breaks above this hurdle or not will decide the next move. A strong break above $15.10 will be bullish. Such a break can take silver initially higher to $15.20. A further break above $15.20 will then increase the likelihood of the prices extending its up-move to $15.30 and $15.35 thereafter.

On the other hand, if the prices reverse lower from $15.10 in the coming day, a fall to $15 and $14.90 is possible. It will also turn the possibility high of the prices revisiting $14.80 levels thereafter. In that case, silver can trade sideways between $14.80 and $15.10 for some time.

On the domestic front, the MCX-Silver (₹37,518 per kg) has been stuck in between ₹36,830 and ₹37,730 over the last couple of weeks. A test of ₹37,730 is likely in the near term. But whether the contract breaks above ₹37,730 or not will decide the next move. A strong break above ₹37,730 will take the contract initially higher to ₹38,150. A further break above ₹38,150 will then increase the likelihood of the contract targeting ₹38,500-38,600 thereafter. On the other hand, if the contract reverses lower from ₹37,730 in the coming days, the sideways range will remain intact and a fall to ₹36,830 is possible. A break below ₹36,830 can drag the contract lower to ₹36,500. A further break below ₹36,500 will see the contract tumbling to ₹36,000 thereafter.

The writer is Chief Research Analyst at Kshitij Consultancy Services

Published on April 28, 2019

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