Commodity Analysis

Gold likely to remain under pressure

Gurumurthy K | Updated on May 27, 2018 Published on May 27, 2018

Strong dollar is likely to cap the upside in prices

In a surprise move, gold prices declined below the key level of $1,300 per ounce in the middle of this month. This has brought the prolonged sideways consolidation in gold prices — between $1,300 and $1,370 — to an end.

The strength in the US dollar has played spoil sport to an otherwise healthy uptrend in prices in the beginning of the year. A strong surge in the US dollar index dragged gold prices to a low of $1,282 earlier last week. But, US President Donald Trump’s calling-off of his meeting with North Korean leader Kim Jong Un, that triggered political tensions, gave gold a breather.

The yellow metal bounced back above $1,300 again to a high of $1,307 on Friday. But the possibility of gold sustaining above $1,300 remains uncertain as Trump on Friday said that his meeting with Kim could still happen as scheduled on June 12, which could once again ease the tension.

Strong dollar

While the uncertainty over the US-North Korea meet may support gold prices, strong dollar, on the other hand, may continue to keep the yellow metal under pressure in the short term. The US dollar index (94.25) is on a strong footing, and has surged breaking above a key level of 93.

Though there is some resistance near current levels, the overall bullish outlook remains intact. The current uptrend in the index is likely to extend in the coming weeks, and can target 95 or even 96 levels over the short term. The rally in the dollar index will drag gold prices lower again below $1,300 in the coming days.

The dollar index will come under pressure only if it declines below 93. Such a break, though, looks less likely at the moment.

Gold outlook

The global spot gold ($1,302 per ounce) came off last week from its high of $1,307. A crucial resistance in the $1,308-$1,310 region has capped the upside in gold. A strong break above $1,310 is needed for the outlook to turn completely positive. Such a break will ease the downside pressure and can take the prices higher to $1,325. A further break above $1,325 will then increase the likelihood of the prices revisiting $1,350 levels thereafter.

But as long as gold remains below $1,310, it is likely to remain under pressure and break below the immediate support level of $1,298. Such a break can take the prices lower to $1,280 or $1,275 in the short term. A further break below $1,275 will see the fall extending to $1,260. The level of $1,260 is a strong medium-term trend support, and a fall below this level is less probable at the moment.

On the domestic front, the gold futures contract on the Multi Commodity Exchange (MCX) came off after making a high of ₹31,510 per 10 gm. It closed the week at ₹31,189. The contract has been broadly range-bound between ₹30,850 and ₹31,620 since April. Within this range, the possibility of the contract moving down towards ₹30,850 — the lower end of the range — is high in the near term.

However, the possibility of the contract breaking below ₹30,850 seems lower. A bounce back from ₹30,850 will see the contract rallying back to ₹31,500 levels. An eventual break above ₹31,600 will see the MCX-Gold futures contract targeting ₹32,500 and ₹33,000 over the medium term.

Traders can hold the long positions taken at ₹31,100. Accumulate on dips at ₹30,900. Retain the stop-loss at ₹31,250 for the target of ₹32,000. Revise the stop-loss higher to ₹31,550 as soon as the contract moves up to ₹31,800.

Silver outlook

The global spot silver ($16.51 per ounce) has been stuck inside a narrow range between $16.15 and $16.85 over the past three weeks.

A breakout on either side of $16.15 or $16.85 will determine the next trend. A strong break below $16.15 can drag silver lower to $15.75 or $15.60. On the other hand, if silver manages to decisively rise past $16.85 in the coming days, it can rally to $17.25.

The outlook for the MCX-Silver (₹40,267 per kg) futures contract is mixed. Like the global spot prices, the MCX-Silver contract has also been range-bound over the past three weeks. The contract is stuck in between ₹39,500 and ₹40,900. A breakout of this range will give a clear cue on the next trend.

If the contract breaks the range below ₹39,500, a fall to ₹39,000 is possible. On the other hand, if the contract manages to breach the range above ₹40,900, the contract can gain momentum. Such a break can trigger a fresh rally to ₹42,000.

Published on May 27, 2018
This article is closed for comments.
Please Email the Editor