Supports to limit the downside in gold

Gurumurthy K | Updated on January 09, 2018

Near-term weakness in the dollar can help the yellow metal move higher

It was a volatile week for gold. The yellow metal began the week on a positive note.

Reports stating that the US tax reforms could be delayed by a year coupled with a weak US dollar pushed the spot gold price to an intra-week high of $1,288 per ounce on Thursday. But a sudden and sharp downward reversal on Friday eroded most of the gains made during the week and dragged gold lower. The precious metal closed the week at $1,275 an ounce, up 0.41 per cent for the week.

Silver remained subdued all through the week. Global spot silver made a high of $17.26 an ounce and fell back to close the week 0.24 per cent higher at $16.88.

On the domestic front last week, the gold futures contract on the Multi Commodity Exchange snapped its three-week fall by surging 1.4 per cent aided by weak rupee. It closed at ₹29,491 per 10 gm. The MCX-Silver futures contract moved in tandem with the global price. It touched a high of ₹40,100 per kg but reversed to close the week at ₹39,507, up 1.2 per cent.

Dollar – weak in near term

The dollar index couldn’t breach 95, despite several attempts made in the past week. The index came off its high of 95.15 on Tuesday to close the week at 94.39. Though there is a support near current levels at 94.30, the index looks vulnerable to break below it. The near-term outlook is bearish for the index with resistance at 94.70. A fall to 93.85 or 93.75, looks likely in the coming days. Such a fall can limit the downside in gold and push it back higher in the near term.

However, the downside in the dollar index is likely to be limited. The presence of the neckline support of the inverted head and shoulder formed between July and October and the 100-day moving average in the 93.85-93.75 zone make it a strong support region for the index.

As such, it is likely to reverse higher again from this support zone. Such a reversal may take the index higher to 95 levels again. A strong break and a decisive close above 95 will then pave way for the next targets of 96 and 96.5 over the medium term.

Gold outlook

Prior to the fall last Friday, the yellow metal was turning stronger with a rounding pattern. But, with the fall in the last trading session, the momentum has lost some pace. As long as it trades below $1,280, a dip to $1,270 or $1,265 cannot be ruled out.

Cluster of supports in between $1,265 and $1,260 can limit the downside. But a break below $1,260, if seen, can take the yellow metal further lower to $1,255.

That said, a strong bounce from the $1,265-$1,260 support zone may have the potential to break above $1,280 thereafter. Such a break can boost the momentum and take gold higher to $1,295 and $1,300.

On the domestic front, the strong rally in the MCX-gold (₹29,491 per 10 gm) last week is technically significant. It marks the end of the near-term downtrend, in place since September. The short-term outlook is bullish for the MCX contract.

Immediate support is at ₹29,460 and the next significant supports are at ₹29,250 and at ₹29,100. Dips to these supports may find fresh buyers in the contract.

Additionally, weak outlook for the rupee can support in limiting the downside in the contract. The rupee closed on a weak note, at 65.17 against the dollar last week. It is more likely to weaken towards 66 against the dollar in the short term.

As such, a rally to ₹30,000 looks more likely in the MCX-gold contract in the coming days. A strong break and a decisive close above ₹30,000 will then pave way for the next targets of ₹30,500 and ₹31,000 over the medium term.

Traders with a medium-term perspective can go long at current levels.

Accumulate on dips at ₹29,300 and ₹29,150. Keep the stop-loss at ₹28,900 for the target of ₹30,700. Revise the stop-loss higher to ₹29,650 as soon as the contract moves up to ₹29,950.

Silver outlook

The 200-week moving average at $17.22 is limiting the upside in global spot silver ($16.88 per ounce) over the last few weeks.

As long as it trades below $17, a fall to $16.5 cannot be ruled out in the near term. A bounce thereafter can take the prices higher to $17 and $17.25 again.

Broadly, silver can remain range-bound between $16.5 and $17.5. A breakout on either side of this range will then give a clear cue on the next trend.

The MCX-Silver (₹39,507 per kg) futures contract is struggling to breach the psychological ₹40,000 mark. A dip to ₹39,000 is likely in the near term.

A break below it can drag the contract further lower to ₹38,350.

On the other hand, the contract will need to break above ₹40,000 to gain momentum. Such a break can take it higher to ₹40,600.

Published on November 12, 2017

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