Commodity Analysis

Gold stays afloat, but struggles to gain strength

Gurumurthy K | Updated on May 12, 2019 Published on May 12, 2019

Gold moved up and managed to sustain relatively higher within its sideways range, last week. The global spot gold made a high of $1,292 per ounce and fell back to close the week 0.5 per cent higher at $1,286 per ounce.

On the domestic front, a weak rupee helped the gold futures contract on the Multi Commodity Exchange (MCX) gain more than the global price. The MCX-Gold futures contract rallied 1.5 per cent and closed the week at 31,904 per 10 gm.

A strong sell-off in the global equities helped global spot gold remain at the upper end at of its $1,266-1,292 sideways range last week. US President Donald Trump tweeting on May 5 to increase the import tariffs on Chinese goods from 10 per cent to 25 per cent triggered this sharp fall in the global equities all through last week. All major indices such as the Dow Jones Industrial Average (-2.1 per cent), Nikkei 225 (-4.1 per cent), Shanghai Composite (-4.5 per cent), and India’s Sensex (-3.9 per cent) and Nifty 50 (-3.7 per cent) were knocked down last week.

The developments on the US-China trade talk will need a close watch. Any positive development in it will trigger a sharp bounce-back in the equities, which in turn can pull gold lower.

Lacking strength

Though the sell-off in equities helped gold stay afloat, the yellow metal is still struggling to breach the range above $1,292. This is something important to watch out for, which might reflect the inherent weakness in gold.

A dip in the US dollar index also failed to support gold gaining momentum. The US dollar index (97.32) inched lower but at a slower pace. Though it can dip further in the near term, the key supports at 96.90 and even 96.70 can limit the downside and trigger a reversal. A bounce from 96.90 or 96.70 can take the index higher to 98 levels again. As such, the upside in gold is likely to be limited in the coming days.

Gold outlook

In spite of the strong sell-off in equities, gold could not decisively rise past $1,292. This reflects the inherent weakness in it. The global spot gold ($1,286 per ounce) is retaining its $1,266-12,92 sideways range. Though there is still a possibility of gold breaking above $1,292, the upside is likely to be capped at $1,297-1,300. A strong rally beyond $1,300 looks unlikely. An intermediate support is at $1,280. A break below it can take gold lower to $1,270-$1,266 in the coming days. An eventual break below $1,266 will then increase the likelihood of the fall extending to $1,255.

MCX-Gold (₹31,904 per 10 gm) futures contract has been stuck in a sideways range between its support at ₹31,150 and resistance at ₹32,135 (21-week moving average) over the last few weeks. A breakout on either side of this range will determine the next move. A strong break above ₹32,135 can take the contract initially higher to ₹32,500. A further break above ₹32,500 will then increase the likelihood of the contract extending its up-move to ₹33,000 or even higher over the medium term. On the other hand, if the contract breaks the range below ₹31,150, a fall to ₹30,600 is possible.

Silver underperforms

The global spot silver extended its fall for the second consecutive week. The global spot Silver prices fell 1 per cent last week and closed at $14.79 per ounce, thereby underperforming gold. On the domestic front, the weak rupee helped the MCX-Silver futures contract close 1.8 per cent higher at 37,354 per kg.

The global spot silver ($14.79 per ounce) remains bearish as it failed to rise past the psychological level of $15 per ounce. A fall to $14.60 and $14.50 is possible in the coming days. The medium-term picture is more bearish. There is a strong likelihood of silver tumbling to even $14 over the medium term on a break below $14.50.

MCX-Silver (₹37,354 per kg) looks mixed. It has a key support at ₹37,200 and resistance at ₹37,700. A breakout on either side of these levels will decide the direction of the next move. A break below ₹37,200 will take the contract initially lower to ₹36,900. A further break below ₹36,900 will increase the likelihood of the contract tumbling to ₹36,300 in the coming days. On the other hand, if the MCX-Silver contract breaks the range above ₹37,700, a rally to ₹38,150 and ₹38,450 is possible.

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The writer is Chief Research Analyst at Kshitij Consultancy Services


Published on May 12, 2019

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