Commodity Analysis

Gold likely to retain its strength

Gurumurthy K | Updated on November 26, 2018 Published on November 25, 2018

But the dollar’s strength could restrict the pace of the up-move

Gold inched higher in the initial part of last week, but failed to sustain higher. The global spot gold prices made a high of $1,230 per ounce last Wednesday and reversed lower, giving back all the gains. The yellow metal closed the week on a flat note at $1,223 per ounce.

A recovery in the US dollar capped the gains in gold last week. However, gold managed to limit the downside well amid the dollar strength. This indicates the inherent strength in gold and it keeps the broader view positive for the yellow metal. Silver continues to underperform gold.

The global spot silver made a high of $14.56 per ounce last week. The prices reversed sharply lower from the highs, to close the week at $14.29 per ounce, down 0.93 per cent for the week.

The sharp appreciation in the Indian rupee is continuing to weigh on the domestic bullion prices. The rupee has appreciated by 4.6 per cent against the US dollar this month, from around 74 to the current levels of 70.69. This has strongly beaten down the gold and silver futures contract on the Multi Commodity Exchange (MCX).

The MCX-Gold futures contract extended its fall for the fourth consecutive week. The contract fell 1.6 per cent last week and closed at ₹30,495 per 10 gm. The MCX-Silver futures contract tumbled 2.5 per cent to close the week at ₹36,061.

The possibility of the Indian rupee strengthening further towards 69 in the coming weeks may continue to keep the domestic prices subdued for some more time.

US-China meet

All eyes will be on the G20 meeting this week. The US and China are likely to discuss the trade tariff issue.

The outcome of the meeting will be one of the major triggers that could set the short-term trend in gold. A no compromise on the tariffs levied by the US on Chinese goods will increase the risk aversion in the market. This will be positive for gold.

Dollar outlook

The dollar index (96.92) reversed higher last week from around 96. Though the weekly charts give mixed signals, the indicators on the daily candles are positive.

This leaves the near-term bias bullish for the dollar index. The immediate resistance is at 97.15. A strong break above it can take the index higher to 98 or even 98.5 in the short term. As such, the upside in gold could be restricted if the dollar strengthens further from the current levels.

The US dollar index will come under pressure only if it breaks decisively below 96. In such a scenario, it can fall initially to 95.75 and 95.5. A further break below 95.5 can then drag it to 95.

Gold outlook

The global spot gold ($1,223 per ounce) prices can remain range-bound in the near-term between its support at $1,220 and resistance at $1,230.

A breakout on either side of $1,220 or $1,230 will then decide the next leg of the move.

A break below $1,220 can take the prices lower to $1,212 and $1,207 in the coming days. On the other hand, if gold manages to breach $1,230, an up-move to $1,240 and $1,246 is possible. The indicators on the chart are positive.

The 55-day moving average is on the verge of crossing the 100-day moving average. This is a positive signal indicating that the downside could be limited. It also leaves the possibility high of the yellow metal breaking above $1,230 in the coming days.

On the domestic front, the MCX-Gold (₹30,495 per 10gm) has a crucial support at ₹30,300.

A bounce from this support and a subsequent break above ₹30,700 can take the contract higher to ₹31,200 over the short term. But if MCX-Gold declines below ₹30,300, it can fall to ₹29,800 or ₹29,700.

Silver outlook

The global spot silver ($14.29 per ounce) came off after making a high of $14.56 in the past week. The immediate support is at $14.20. A break below it can take silver lower to $14 or $13.9 this week. On the other hand, if silver manages to sustain above $14.20, it can move up to $14.5 levels again. The key resistance is in between $14.50 and $14.60. A strong break above $14.60 can take the silver prices higher to $14.75.

The MCX-Silver (₹36,061 per kg) is hovering above a key support level of ₹35,800. A break below it can take the contract lower to ₹35,400 and ₹35,300.

The region around ₹35,300 is a crucial long-term support, which may halt the current downtrend. As such, the price action in the ₹35,400-35,300 region will need a close watch.

Trading strategy

Medium-term traders can hold the long positions taken last week on dips at ₹36,600, ₹36,100 and ₹35,850. Retain the stop-loss at ₹35,100 for the target of ₹38,700. Revise the stop-loss higher to ₹37,150 as soon as the contract moves up to ₹37,950.

Published on November 25, 2018
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