Commodity Analysis

Gold snaps five-week rally

Gurumurthy K | Updated on January 21, 2018 Published on January 21, 2018

The uptrend can resume and target $1,370 after a short-term consolidation

After surging for five consecutive weeks, the rally in gold halted last week. Global spot gold fell after touching a high of $1,344.8 per ounce last Monday. However, lack of strong selling pressure limited the downside. The yellow metal made a low of $1,324 and has bounced slightly from there to close the week slightly lower by 0.4 per cent at $1,331per ounce.

Silver on the other hand was beaten down strongly . Global spot silver fell sharply after touching a high of $17.42 per ounce to a low of $16.81 before closing the week at $17 per ounce. Silver was down more than 1 per cent last week.

But things were different on the domestic front. Surprisingly, the gold futures contract on the Multi Commodity Exchange (MCX) gained last week. This is thanks to the sudden weakness in the rupee from 63.5 towards 64 against the US dollar. The MCX-Gold futures contract fell to a low of ₹29,550 per 10 gm and reversed to close the week 0.7 per cent higher at ₹29,755 per 10 gm. The MCX-Silver contract, however, fell in tandem with global prices to close the week on a negative note. But, the loss in the contract was limited. The contract has closed at ₹38,969 per kg, down, 0.24 per cent for the week.

Dollar mixed

The uncertainty that prevailed over the US government running into a shutdown kept the dollar under pressure. The dollar index was volatile and range bound with a negative bias between 90 and 91 all through last week.

A crucial support for the index is poised at 89.80, which is likely to be tested in the coming days. Whether the dollar index manages to reverse higher from there or not will be key in determining the next move.

If the dollar index breaks decisively below 89.8, it can fall to 88 thereafter. Such a fall can aid in pushing the gold price higher. But if the index manages to bounce from 89.9 and sustains higher, the downside pressure may ease. The index can then move up to 91 again.

A break above 91 will see the relief rally extending to 92.

Gold outlook

The global spot gold ($1,331 per ounce) is not gaining strength to break above $1,340 decisively. Immediate support is at $1,325. A break below this will increase the likelihood of the prices falling to $1,313 or $1,310 in the short term. The region between $1,310 and $1,300 is a strong support for gold. Dips to this support zone is likely to bring fresh buyers into the market. An eventual reversal thereafter will see gold rallying back to $1,340 levels. A break above $1,340 can target $1,350 initially. Further break above $1,350 will see the upmove extending to $1,370 — a crucial long-term resistance for gold. The price action around $1,370 will need a close watch as this will be key to the move thereafter.

On the domestic front, the outlook for the MCX-Gold (₹29,755 per 10 gm) remains bullish. A rally to ₹30,050 is likely in the near-term as long as the contract sustains above ₹29,550. Inability to break above ₹30,050 can trigger an intermediate corrective fall towards ₹29,500 or ₹29,350. However, such a downmove could be a good opportunity for traders with a medium-term perspective to go long. An eventual break above ₹30,050 will see the contract targeting ₹31,000 over the medium-term.

Traders with a medium-term perspective can go long on dips at ₹29,500 and ₹29,350. Stop-loss can be placed at ₹28,850 for the target of ₹31,000.

Silver outlook

The global spot silver ($17 per ounce) is broadly range bound between its support at $16.7 and resistance at $17.5 over the last three weeks. The immediate outlook is unclear. A breakout on either side of $16.7 or $17.5 will decide the next trend.

A break below $16.7 can take the prices lower to $16.5 initially. Further break below $16.5 will increase the likelihood of the fall extending to $16. On the other hand, silver can gain bullish momentum if it breaks above $17.5 decisively. Such a break will pave way for a fresh rally to $18 and $18.5

MCX-Silver (₹38,969 per kg) on the other hand is not gaining strength to break the resistance at ₹39,500. A dip to test the support at ₹38,500 is likely in the near-term. A break below ₹38,500 can take the contract lower to ₹38,000. But if the contract manages to bounce from ₹38,000, an upmove to ₹39,500 is possible again.

A strong break above ₹39,500 is needed for the contract to gain fresh momentum. Such a break will pave way for a fresh rally to ₹40,000 or even ₹40,700.

Published on January 21, 2018

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