Derivatives

Gold shines on stimulus overdose

Gurumurthy K | Updated on March 09, 2018

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But there’s stiff resistance ahead



Celebrations continue in the bullion market as gold prices skyrocketed for the third consecutive week. Globally, gold spot prices opened at $1,118 per ounce last week and surged to a high of $1,175 before closing at $1,173, up 5 per cent.

On the domestic front, the gold futures contract on the Multi Commodity Exchange (MCX) rallied 4.5 per cent to ₹27,834 per 10 gm intra-week.

But the contract gave back some of its gains as the rupee strengthened against the dollar in the latter part of the week. The contract has closed at ₹27,524, up 3 per cent.

Among the other precious metals, silver closed 5.2 per cent higher at $15 per ounce and platinum at $911.6 per ounce, up 4.6 per cent.

Dollar under pressure

Precious metals are gaining strength from the recent weakness in the dollar. The greenback came under renewed pressure after the European Central Bank left the doors open for more stimulus in its January meeting.

The US Federal Reserve’s decision to wait and watch by keeping its rate unchanged and the Bank of Japan surprising the markets with a negative interest rate intensified the pressure on the dollar. A global increase in risk appetite has taken the sheen off the dollar.

A strong rise in the euro from 1.08 to 1.12 and in the Japanese yen from 121 to 117 has dragged the dollar index sharply lower from near 100 levels to 97 in just one week.

All this has helped gold snatch back its safe-haven status from the dollar.

The dollar index has strong resistance near 98. As long as it trades below this hurdle, it can fall to 96.5 or even 95.75 in the coming weeks.

The Chinese markets are closed the entire week for the New Year holidays. In the absence of China, movement in the US dollar is going to influence the gold price movement this week.

On the charts

The global spot gold price has key resistance ahead at $1,175. Given that the yellow metal has risen sharply in a very short span of time, the possibility is high that this resistance will put a stop to the current rally. A strong reversal from $1,175 can trigger a correction to $1,150 in the short-term. A further break below $1,150 can drag the price lower to $1,135. However, downside is expected to be limited to $1,150 and $1,135 at the moment.

On the other hand, if gold manages to surpass the hurdle at $1,175, the rally can extend to $1,200.

Silver also faces resistance at $15.10 — the 200-day moving average. A strong break above this level is needed for the current rally to extend to $15.35 and $15.5. But inability to rise past $15.1 can drag silver lower to $14.75 and $14.5 in the coming days.

On the domestic front, the MCX-gold futures contract has significant support at ₹27,000 and ₹26,850 — the 100-week moving average. Though a test of these support levels cannot be ruled out in the initial part of the week, the outlook will turn negative only if the contract declines below ₹26,850. A strong reversal from the above support level will keep the uptrend intact for a target of ₹28,000 and ₹28,200.

MCX-Silver is hovering above the 200-day moving average support at ₹35,490. If it can sustain above this support and gains momentum, a rally to ₹36,500 and ₹37,000 is possible this week. Such a rise will also increase the chances for the contract to test even ₹38,000

On the other hand, a strong break below the 200-day moving average support can drag the MCX-Silver futures contract lower to the next targets of ₹35,000, ₹34,800 and ₹34,500.

Published on February 07, 2016

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