Commodity Analysis

Gold retains uptrend, but lacks momentum

Gurumurthy K | Updated on August 18, 2019 Published on August 18, 2019

A strong rise past $1,538 is needed to sustain the rally

Gold is managing to sustain above the psychological level of $1,500 per ounce. However, the yellow metal seems to lack strength to extend its upmove at a faster pace. The global spot gold prices fell to a low of $1,480 per ounce and reversed sharply higher to close at $1,513.5 per ounce on Friday, up 1.1 per cent for the week.

Silver dipped to test the key support level of $16.60 initially last week and then bounced sharply from there. The global spot silver prices have closed at $17.11 per ounce, up 0.8 per cent for the week.

Risk aversion aids

The renewed tension on the US-China trade war front has increased risk aversion in the market since the beginning of this month. As a result, the global equities have been beaten down badly so far this month. The major indices like the Dow Jones Industrial Average, Shanghai Composite, Nikkei 225 are down between 3.5 per cent 5.2 per cent. This, in turn, has helped gold to gain and the yellow metal has surged over 7 per cent over this period.

In addition to this, concerns of global growth slowing down and witnessing another recession following the recent rout in the global bond yields have given additional support to gold.

Against this background, all eyes will now be on the Jackson Hole Symposium that begins on Thursday. Market will be keen to hear from the US Federal Reserve Chairman Jerome Powell on the central bank’s future policy actions. Any hint on more rate cuts in the future will give additional boost to gold, which will take the prices up further. But if Powell retains his stance that the rate cuts are just mid-cycle adjustments, gold prices could tumble on profit-booking.

Watch the dollar

While the high risk aversion in the market is aiding gold prices to sustain higher, a strong bounce in the US dollar index last week has been capping the upside in the yellow metal prices. The US dollar index (98.15) rose sharply, breaking above the key resistance level of 97.50 in the past week. The near-term outlook is bullish and the index can test the next resistance level of 98.55. A strong break above 98.55 will pave way for a further rise to 99. Such a move can restrict the pace of rise in gold. Cluster of supports is poised in the 97.85-97.70 region for the dollar index, which can limit the downside in the near term.

Gold outlook

The near-term outlook looks mixed. The global spot gold ($1,513.5 per ounce) has a key support at $1,478 and resistance at $1,538. A range-bound move between $1,478 and $1,538 is possible for some time. A breakout on either side of $1,478 or $1,538 will then determine the next leg of move. A strong break above $1,538 is needed for gold to resume the uptrend.

Such a break will then pave way for a fresh rally to $1,585 and $1,600 in the coming weeks. On the other hand, if gold declines below $1,478, it will come under pressure. In such a scenario, a fall to $1,450-$1,440 is possible in the near term. A further break below $1,440 will then increase the likelihood of the fall extending to even $1,400 thereafter.

Silver outlook

The global spot silver ($17.11 per ounce) is managing to hold above the key support level of $16.6. As long as silver sustains above this support, the outlook is bullish for it to rise back to $17.5 and even $18 in the coming weeks. The bullish view will get negated if silver declines below $16.6. In such a scenario, a fall to $16.15-$16 can be seen.

Domestic price outlook

The gold and silver futures contracts on the Multi Commodity Exchange (MCX) were mixed. The MCX-Gold futures contract was down marginally by 0.1 per cent, while the MCX-Silver contract rose 1.2 per cent last week. The MCX-Gold closed the week at ₹37,938 per 10 gm and the MCX-Silver at ₹43,824 per kg.

The near-term outlook for the MCX-Gold (₹37,938 per 10 gm) is mixed. The contract seems to be consolidating between ₹37,300 and ₹38,700. A breakout on either side of this range will decide the next move. A strong break and decisive daily close above ₹38,500 will increase the possibility of the contract breaking above the ₹38,700 range. But inability to breach ₹38,500 will keep the bias negative. In such a scenario, the MCX-Gold contract will remain vulnerable for a sharp corrective fall to ₹37,000 and ₹36,500 in the coming days.

Similarly, the MCX-Silver (₹43,824 per kg) has to breach ₹44,000 decisively to keep the uptrend intact and rise to ₹45,000 and ₹45,750. But as long as it trades below ₹44,000 a corrective fall to ₹42,500 cannot be ruled out in the near term.

The writer is Chief Research Analyst at Kshitij Consultancy Services

Published on August 18, 2019
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