Commodity Analysis

Watch for the China factor

Gurumurthy K | Updated on January 22, 2018 Published on September 06, 2015

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Gold buyers should tune into the Chinese markets, opening after a long weekend, and the dollar index



Bullion prices have taken a beating again this week, losing the sheen they had acquired during the Chinese stock market rout. Global spot gold prices failed to breach $1,150 an ounce and reversed after hitting $1,148 on Tuesday. The yellow metal closed at $1,122 on Friday, down 1 per cent for the week. The dollar index (96.23) recovering its mojo and moving higher from its intra-week low of 95.2 played spoilsport for gold. Silver lost all of the 2.5 per cent gains it made intra-week, after the US jobs report prompted it to sink on Friday to $14.58 per ounce.

On the domestic front, the gold futures contract traded on the Multi Commodity Exchange (MCX) followed suit to close almost flat at ₹26,532 per 10 gm. The MCX Silver futures contract managed to edge a per cent higher to ₹34,715 per kg.

Mixed signals

The US jobs data released on Friday has left the markets befuddled about whether a rate hike is in the offing later this month. The data was expected to offer cues on the US Federal Reserve flagging off its rate hike cycle when it meets on September 16 and 17. But the data was mixed. The unemployment rate continued its decline and fell to 5.1 per cent in August — the lowest since April 2008. But the gains in new jobs failed to meet market expectations. The US added 1,73,000 jobs in August as against the market expectation of 2,20,000 jobs. However, the payroll numbers for the month of June and July were revised higher.

This offers some hope that the recovery in the US job market is continuing. With such mixed cues, the market is expected to remain indecisive until the outcome of the Federal Reserve meet next week. Gold prices could see sharp swings in either direction ahead of that event.

What to watch

China will need a close watch this week as markets open after a long weekend. The Chinese markets were closed since Thursday for public holidays which allows for the possibility of a gap, when the markets open today. If China takes cues from Friday’s sell-off in the global equity markets, then it could sink once again, lifting gold prices. Remember that the Chinese crisis managed to boost gold prices even though both the Russian and the Greece crises failed to catalyse the yellow metal. Chinese currency devaluation last month has helped gold prices reverse direction in recent weeks.

Therefore, developments in China will need a close watch as they influence gold prices until the Fed meets next week. The second factor to watch out for is the dollar index. It has immediate support at 96. If the index manages to sustain above this support, then a rise to 97 and 97.5 is possible this week. Such a rise can keep gold prices under pressure and push it lower in the coming days.

On the charts

After two consecutive weeks of lower close prices, the short-term outlook continues to remain negative for gold. The immediate resistance is at $1,127. Inability to surpass this resistance can keep prices under pressure and drag them down to supports at $1,107 and $1,100. A break below the psychological support level of $1,100 will increase the danger of prices revisiting $1,080-1,075 levels. On the other hand, a reversal from these supports will see gold moving higher to $1,120 and even $1,150.

On the domestic front, the MCX-gold futures contract closed on a mixed note last week. The 21-day moving average at ₹26,289 is the immediate support. A key trendline support is also poised at around ₹26,000.

A test of these supports is possible while the contract trades below the resistance at ₹26,900. However, the outlook for the contract will turn bearish only if it falls below ₹26,000.

Such a fall can drag it lower to ₹25,500 or below. But if the contract manages to reverse higher after testing the support at ₹26,000, then ₹26,500 and ₹27,000 are in the offing.

MCX-Silver is facing strong resistance at ₹35,000. A strong break above this hurdle is needed for the contract to gain momentum and rally to ₹36,000 thereafter.

But a failure to breach ₹35,000 could set it up for a fall to ₹34,000 and ₹33,500.

Published on September 06, 2015
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