Commodity Analysis

Gold spikes to multi-year high...

Gurumurthy K | Updated on June 23, 2019 Published on June 23, 2019

...as the US Federal Reserve opens the door for rate cuts in the future

It was a memorable week for gold. The yellow metal surged to test the psychological level of $1,400 for the first time since 2013 and made a multi-year high of $1,412 last week.

The prices, however, came off slightly from the high, and closed at $1,399.63 per ounce, up 4.3 per cent for the week.

The global spot silver surged to an intra-week high of $15.55, but fell back from there. Silver closed the week at $15.35 per ounce, up 3.1 per cent for the week.

Fed triggers

The major trigger for this rally in gold came from the outcome of the US Federal Reserve meeting last week. The Fed kept the rates unchanged and opened the doors for rate cuts in the future.

However, the Fed’s projections show the possibility of rate cuts only next year. This is contrary to the market expectation of seeing 2-3 rate cuts this year itself. Indeed, after last week’s meeting the odds have increased in the market of the Fed going ahead and cutting rates in its next meeting (July) itself.

Fed Chairman Jerome Powell said the central bank would want to see if the recent headwinds to the economic growth continue to sustain, before deciding to lower the rates.

As such, the incoming economic data from the US and the developments on the trade war will need a close watch in the coming weeks, which would be key for the Fed to revise its stance in its next meeting.

Dollar tumbles

The US dollar index declined sharply, breaking below the key support level of 96.5.

The index was down 1.4 per cent and closed at 96.22. The outlook for the index is negative. It can fall to 95.60-95.60 on a break below 96. Such a fall in the index will help gold sustain higher.

Gold outlook

The strong surge and the decisive close above $1,360 is a positive for gold ($1,399.63 per ounce). This gives an early sign that the multi-year sideways consolidation could have come to an end. The immediate resistance is at $1,405.

A break above it can take gold further higher to $1,425 in the coming days. But an inability to breach $1,405 can trigger a corrective fall to $1,375 or $1,360 in the coming days. The level of $1,360 will be a crucial support to watch. Only a decline below $1,360 will turn the outlook negative again. A sideways consolidation between $1,360 and $1,405/$1,425 is also possible for some time. As long as gold sustains above $1,360, there is a strong likelihood of seeing a rise to $1,450 in the coming weeks.

Silver outlook

The global spot silver ($15.35 per ounce) has a key resistance at $15.75 and support in the $15.10-15.00 region. A sideways consolidation between $15 and $15.75 is possible for some time.

A breakout on either side of $15 or $15.75 will decide the direction of the next move. The bias on the chart is bullish. Silver is likely to sustain above $15. As such, an eventual break above $15.75 will boost the momentum and take silver higher to $16 and $16.25 in the coming weeks.

Domestic outlook

The gold and silver futures contract on the Multi Commodity Exchange move in tandem with the global prices. The MCX-Gold futures contract surged 3.4 per cent last week and closed at ₹34,167 per 10 gm. The MCX-Silver futures contract closed the week at ₹37,954 per kg, up 2.5 per cent for the week.

The outlook for the MCX-Gold (₹34,167 per 10 gm) is bullish. The contract has risen above the key resistance level of ₹33,700. As long as the contract trades above ₹33,700, there is a strong likelihood of it breaking above the immediate resistance level of ₹34,400. Such a break will trigger a fresh rally to ₹35,000.

The bullish outlook will get negated if the contract declines below ₹33,700. In such a scenario, a fall to ₹33,000 and ₹32,500 is possible.

The MCX-Silver (₹37,954 per kg) has broken its ₹36,400-37,750 sideways range on the upside. The region between ₹37,750 and ₹37,500 will now act as a strong support.

As long as the contract trades above ₹37,500, there is a strong likelihood of it rallying to ₹39,000 in the coming weeks. The short-term view will turn negative only if the contract declines below ₹37,500. In that case, the contract can fall to ₹37,000 and ₹36,800.

The writer is Chief Research Analyst at Kshitij

Consultancy Services

Published on June 23, 2019

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