Upside in gold could be short-lived

Gurumurthy K | Updated on July 23, 2018

Cluster of resistances may cap the up-move and keep the yellow metal under pressure

Gold extended its fall last week, breaking below the key support level of $1,238 per ounce. A strong dollar continued to add pressure on the yellow metal and dragged the prices lower. The US dollar index surging to a high of 95.65 dragged the global spot gold prices over 2 per cent to an intra-week low of $1,211.6. However, US President Donald Trump raising concerns on the dollar strength and the US Federal Reserve’s rate hikes played spoil sport for the greenback’s rally. The dollar index sharply reversed lower from its high of 95.65 after Trump’s comments, and closed the week at 94.48. This gave a breather to gold, and the prices reversed higher from its low of $1,211.6, recovering some of the loss. Gold closed the week at $1,229.5 per ounce.

On the domestic front, the gold futures contract on the Multi Commodity Exchange (MCX) moved in tandem with the global spot prices. The contract fell to a low of ₹29,638 per 10 g and bounced back from there to close the week at ₹29,920 per 10 g.

Watch the dollar

The US dollar movement will need a close watch as it is influencing the gold prices to a great extent at the moment. The US dollar index (94.48) has a key support at 93.9 and resistance at 95.55. A breakout on either side of 93.9 or 95.55 will decide the next move. Until then, a range-bound move between 93.9 and 95.55 is possible in the near term.

A strong break above 95.55 can take the index higher to 96 or 96.25 initially. A further break above 96.25 will then pave way for the next targets of 97.35, or even 98. On the other hand, if the dollar index declines below 93.9 in the coming days, a fall to 92.8 is possible.

The bias is bullish on the charts. The 21-week moving average is on the verge of crossing over the 55-week moving average. This is a positive sign, indicating that the downside could be limited in the short term. This leaves the possibility high for the index sustaining above 93.9 in the coming days.

As such, the upside in gold could be limited in the near term and a fall to test $1,200 looks more likely.

Gold outlook

The bounce from the low of $1,211.6 last week has given some relief to the yellow metal. But the global spot gold ($1,229.5 per ounce) has a key resistance at $1,240, which is likely to be tested in the near term. If gold manages to breach this hurdle, it can move further higher to $1,250. But cluster of resistances are poised in the $1,250-1,275 region. As such, the pace of the up-move in gold is likely to be limited even if it manages to sustain higher.

On the other hand, if gold fails to breach $1,240 and reverses lower, the downside pressure will remain intact. In such a scenario, the current down-trend can continue and a fall to test the crucial psychological support level of $1,200 is possible. Whether gold manages to bounce from $1,200 or not will decide the next move.

An upward reversal from $1,200 can trigger a relief rally to $1,250. But a break below $1,200 will increase the downside pressure and will drag the prices lower to $1,160 or $1,150.

On the domestic front, the MCX-Gold (₹29,920 per 10 g) has declined below a key support level of ₹30,200 in the past week. This level of ₹30,200 will now act as a strong resistance and will cap the upside. Indicators on the charts are also negative. The 55-day moving average has just crossed below the 100-day moving average, and the 21-day moving average is on the verge of crossing below the 200-day moving average. These indicators suggest that the upside could be limited, and fresh selling interest is likely to emerge at higher levels.

Supports for the contract are at ₹29,650 and ₹29,500. A strong break below ₹29,500 can drag the contract lower to ₹29,000 in the coming weeks.

Mixed signals for silver

Silver continues to underperform gold. The global spot silver prices tumbled 4 per cent intra-week and made a low of $15.18 per ounce. The prices, however, recovered from this low, and closed at $15.51, down 1.9 per cent for the week.

The short-term outlook remains mixed for silver. It is currently poised between a crucial support at $15 and resistance at $15.9. Silver can remain range-bound between $15 and $15.9 in the coming days. A breakout on either side of $15 or $15.9 will then decide the next trend. A break above $15.9 can take silver higher to $16.2 and $16.4. But a break below $15 will increase the likelihood of the prices tumbling to $14.

On the domestic front, the MCX-Silver (₹38,457 per kg) is hovering above a crucial support level of ₹38,000. If it manages to sustain above ₹38,000, an up-move to ₹39,000 or ₹39,300 is possible in the coming week. On the other hand, if MCX-Silver decisively breaks below ₹38,000, a fall to ₹37,500 can be seen initially. A further break below ₹37,500 will then increase the likelihood of the contract tumbling towards ₹36,500 or even ₹36,000 over the medium term.

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Published on July 22, 2018
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