Bullion Cues. Jobs effect to hurt gold

The sell-off in gold has continued for three weeks now, with the major trigger for this fall being continued strength in the dollar. The sell-off intensified last week after strong job numbers in the US surprised markets. Gold prices tumbled over 4 per cent last week to close at $1,089.8 per ounce. All the data points on US jobs pointed to a strong economy. US non-farm payrolls increased by 2,71,000 in October as against the market expectation for an increase of 1,80,000 jobs.

The unemployment rate fell to 5 per cent from 5.1 per cent. The data helped the dollar index (99.17) to breach an important resistance at 98 and surge 2.3 per cent higher for the week, as the data has increased chances for a December rate hike from the US Federal Reserve.

Apart from the falling unemployment rate, one key indicator which has strengthened the case for a rate hike in December is the average hourly earnings of US workers — a major concern cited by the Federal Reserve.

This month, earnings growth, which remained stagnant since 2013 at 1.9 to 2.3 per cent, has increased to 2.5 per cent. This could be a cue for the US Federal Reserve to justify beginning a rate hike cycle.

Following the good job numbers and higher earnings growth, the dollar is expected to remain strong. The dollar index can rise to test the psychological resistance at 100 in the coming weeks. A break above this resistance will open the doors for a fresh rally to 101.80 — a key 61.8 per cent Fibonacci retracement level. The Euro (1.074) — a major component of the dollar index — has declined below an important support at 1.08. A stronger dollar, in turn, will continue to keep bullion prices under pressure.

On the domestic front, the gold futures contract traded on the Multi Commodity Exchange (MCX) fell 3.7 per cent to close at ₹25,523 per 10gm.

The Indian government launched three gold schemes on the eve of Diwali to monetise the idle gold in the country, offer paper gold alternatives and reduce dependence on imports.

While these schemes are aimed at increasing the domestic supply of the yellow metal, they are not expected to impact domestic gold prices immediately. The success of these schemes will depend on the extent of the idle gold extracted out into the market to add to the supply. Until then, domestic gold prices will continue to swing to the tune of the global prices.

The global spot price for gold has declined below an important support at $1,100. The next support is at $1,089, which is likely to be tested this week.

A strong break below it can drag the spot price further lower to $1,065. It will also keep alive the danger of the gold price testing the crucial trend deciding support zone of $1,055-$1,050.

For downside pressure to ease, the price has to break above $1,110 decisively now. But that does not look very probable.

On the domestic front, the Indian rupee is yet to react to US jobs data, which was released after the market had closed. So, there is a strong possibility of the rupee opening with a gap-down. This, in turn, could limit the fall in the MCX-gold futures contract. If prices fall, the contract can fall to ₹25,000 and ₹24,500, which is a crucial support level. A strong break below ₹24,500 will increase the danger of the contract extending its fall to ₹23,650. The contract will need a strong break above ₹26,000 for the downside pressure to ease.

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