Commodity Analysis

Speed breaker ahead for gold

Rajalakshmi Nirmal | Updated on January 20, 2018 Published on March 26, 2016



The dollar’s recovery may hurt the metal

If you invested in gold last year, your portfolio will now be in the green. You may hold it for a little while more to see if the metal gains more momentum.

But this strategy is suggested only for long-term investors. Those with a short horizon better watch out, as there may be some speed breakers ahead.

Last week, spot gold prices declined by 3 per cent as investors started to see the possibility of a rate hike as early next month and the dollar made a smart recovery. Silver closed at $15.18/ounce, down 4 per cent and platinum ended at $947.8/ounce, down 2.5 per cent. The US dollar index gained 1.25 per cent to close at 96.27.

The SPDR Gold Trust however continued to see inflows. The ETF reported its holdings at 823.74 tonnes, up 4.76 tonnes from the previous week.

Indian gold investors are better placed than their counterparts elsewhere. Unlike other currencies such as the Brazilian real, Malaysian ringgit or Russian rouble that have gained vis-à-vis the dollar since January, the rupee has depreciated.

The weak rupee is good news for gold investors in India as the metal is priced in dollars.

But, if there is a sharp downside to gold from here, a weak rupee may not help you much. Last week, gold jewellers in India ended their more than two-week long strike as the Centre agreed to set up a task force to look into the demands of the industry.

However, prices of the yellow metal in the spot market continued to quote at a discount to international prices. The discount was bout $30/ounce.

The initial estimate of collections from the third tranche of the sovereign gold bond, which was released last week, showed a sharp drop in collection compared to the previous issue.

A total of 64,000 applications were received for 1,128 kg of gold of value ₹329 crore. In the second tranche, the bond collected about ₹746.8 crore for 2,872.3 kg of gold. The bond is set to be issued on Tuesday this week.

While gold has been losing some of its fan following, the Tirumala Tirupati Devasthanam, the richest temple trust in India, has asked the Centre if it could consider redeeming deposits made in to GMS (gold monetisation scheme) in gold. In its current form, only short-term deposits (of one to three years) are redeemed in gold.

In February, TTD is said to have deposited 1.4 tonnes of gold with Punjab National Bank for three years under GMS. It is set to move another 1.4 tonnes of gold into the gold deposit scheme of Indian Overseas Bank. Launched in November 2015, GMS of the Centre had collected about 900 kg of gold till January this year.

Cues to watch

The dramatic decline in gold prices last week calls for caution. With the members of the Fed committee now expecting a rate hike in April, the dollar has recovered from its lows. The fourth quarter GDP data released on Friday has further spurred this enthusiasm with growth coming in at 1.4 per cent, higher than the earlier estimate of 1 per cent.

This week, there are a few more key data releases due — consumer confidence data on Tuesday, jobless claims on Thursday and the employment situation and ISM Manufacturing Index on Friday. If there are signs of a stronger economy from any of these data points, the US dollar may rev up further and present a hurdle gold. While there is strong resistance at $1200 and it is unlikely that it will break, a strong upmove in the dollar could see the metal test its support at $1,198 and $1,190. On the higher side, the target is still $1380 as we indicated last week.

Domestic gold outlook

Indian gold investors have so far this year benefited from a weak rupee.

But, given that since the beginning of the month, the currency has been gaining against the greenback (from 68.7 to 66.15 now), you need to be cautious.

MCX gold futures contract’s short term outlook is negative. It closed at ₹28,599, down 1.8 per cent for the week.

Now, if the contract crosses ₹30,000 this week, it may make further gains, else it may love only sideways. Any sharp correction in international gold prices, however, may take the contract down to ₹28,000. Supports are at ₹28,500 and ₹27,800.

MCX Silver closed at ₹36,669 last week, down 2.8 per cent. Downside pressure from here on may take the contract to ₹35,000 if the support at ₹36,500-36,600 is broken.

On the higher side, the contract has resistance at ₹38,000 and ₹38,800.

Published on March 26, 2016
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