Bullion Cues. Time to buy gold?

Gold prices dropped to $1,257/ounce, down about 5 per cent last week, the largest such loss in recent times. Many gold bulls were caught unawares as the yellow metal took a sudden u-turn. This followed fears of the US Federal Reserve increasing its policy rate in December.

Higher rates are negative for gold as it is a non-interest bearing security.

In India, the gold futures contract on the MCX dropped by 4 per cent to ₹29,578. In the spot market, however, discounts dropped due to a little pick-up in demand with the festival season sale starting.

On Monday, in the US, the ISM Manufacturing index rose to 51.5 in September (versus expectation of 50.6) from 49.4 in August, data showed, helped by increase in the number of new orders and production at factories.A reading above 50 signals expansion in manufacturing activity. This made the market happy as it was concerned that the strong dollar would weigh on the market of US goods offshore.

On Tuesday, as the market woke up to strong numbers from the manufacturing sector, remarks from a member of the Fed’s policy committee that a rate hike is favoured, lifted the dollar and gold fell below the psychological level of $1,300/ounce. Wednesday was yet another disappointment for gold bulls. Data showed that the ISM non-manufacturing index rose to 57.1 in September (versus expectation of 53), up from 51.4 in August. The only respite was the employment report that came on Friday. Non-farm payrolls rose by 1,56,000 in September showed data, down from a gain of 1,67,000 in August. The unemployment rate increased by 0.1 percentage point to 5 per cent.

This helped the yellow metal rise from the low of $1,241.5/ounce on Friday and close at $1,257/ounce. Silver ended at $17.5/ounce, down 9 per cent for the week. The US dollar index closed at 96.63, up 1.2 per cent. Buying, however, continued in the gold ETF market. Assets of SPDR Gold Trust, the largest exchange traded gold fund in the world, rose by close to 11 tonnes in the last week to 958.9 tonnes.

In India, the gold futures contract on the MCX closed the week at a loss of less than 4 per cent. The rupee held strong. It closed at 66.68 against the US dollar versus 66.61 in the previous week. Had the currency given up against the dollar, losses for investors would have been lower. In the spot market, discounts on gold bars dropped to $4/ounce. The discounts were as high as $10 a week back and about $30-35.ounce few months back.

While technically, gold looks oversold now, risks for it to go further down are high. There are many reasons for this. First, the demand from India, the largest market for the yellow metal, is weak. Last week data from GFMS showed that India’s gold imports in September dropped 43 per cent from a year ago to 30 tonnes. Imports between January and September dropped 59 per cent to 268.9 tonnes over the same period last year.

Also, there is a possibility that as the US dollar makes more gains, given the weakness of pound sterling on Brexit worries and improving macro economic data from the US, gold prices will be under pressure. With the Fed increasingly favouring at least one more rate hike before end of the year (probably in December), downside risks for gold remain.

However, given that the metal closed around its support at $1250, there is some respite. If this week prices recover further, the metal may move sideways for more weeks. But, if it drops below $1220, it may quickly slide to $1200 levels.

MCX Gold futures contract may largely follow movements in the international price of the metal. But, movements in rupee have also to be watched.

The near term supports for the contract are ₹29,300 and ₹29,000. On the higher side, resistances are at ₹30,000 and ₹30,500.

MCX Silver looks very weak on the charts. Any loss in gold may drive this metal down even sharper. It is better to trade long positions with stop losses.

Supports are at ₹40,000 and ₹39,000. If there is any change in trend, the first target would be ₹45,000. Resistance is around ₹43,000-43,900 levels.

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