Gold rallies as stocks skid

Investors bet on the yellow metal ahead of the Federal Reserve’s monetary policy meet

It was a spectacular week for gold both in international and domestic markets. Gold prices hit a high of $1,238 an ounce and closed at $1,222.6, up 2.5 per cent for the week.

The drop in US and European stock markets and south-bound US dollar helped. The US dollar index dropped to 88.36 from the previous week’s close of 89.3. Spot silver prices rose to $17/ounce, up 4.5 per cent.

Gold investors pooh-poohed the positive retail sales data from the US. Retail sales increased by 0.7 per cent in November, higher than analysts’ expectation of a 0.4 per cent gain.

The upbeat sentiment on gold saw demand for gold ETF units also improve. The US SPDR Gold Trust saw holdings increase by over 5 tonnes to 725.75 tonnes last week.

Investors have become wary about equity and other riskier assets as oil prices continue to drop. WTI Crude dropped below $60 a barrel last week. There is fear that the slump in the oil market may see sovereign defaults in large oil producing countries, including Russia, Norway and Canada and hinder the nebulous global economic recovery.

Cues to watch

With investors fearing a collapse in Russian and other oil dependant economies, gold can edge a wee bit higher in the coming weeks before the year ends. According to the World Bank, the Russian economy can contract by 0.7 per cent in 2015. So, if oil slides further and the Federal Reserve takes a dovish stance on rates in its upcoming meet, gold might get its sheen back. The FOMC meeting is scheduled for Tuesday and Wednesday.

This week, there are a couple of more critical data releases expected in the US. It starts with the industrial production data on Monday followed by housing starts on Tuesday. On Thursday will be the release of the weekly jobless claim number.

Revival of the risks to global economic recovery are a positive for gold.

If Russia’s economy breaks down, it is a negative not just for Europe but also for Europe’s large trade partner — the US. In turn, if US companies falter, global economic recovery will hit a roadblock.

Stock markets will correct and the dollar can retreat. But we need to wait and watch whether or not the above sequence of events actually plays out. What is clear now is that growth outside the US is weak.

For instance, last week, data from China’s National Bureau of Statistics showed that the country’s industrial production for November was below analyst expectations.

On the charts

A move above $1,200/ounce and a close at $1,222 is a positive signal. If, this week, gold crawls up further and manages to cut $1,250-1,260 levels, the short-term trend will turn positive. On the downside, the support is at $1,190.

Indian investors smile

Both gold and silver futures hit the upside targets indicated in this column last week. With FIIs pulling out money from the equity market, rupee lost ground and dropped below 62 against the greenback.

This helped precious metals denominated in dollars move up.

Rupee closed at 62.29, down from 61.78 in the previous week.

The gold futures contract on the MCX hit our upside target of ₹27,000 per 10 gm and closed the week at ₹27,209.

The contract ended with a gain of 3 per cent. Those who closed the contract at our target price would have made a gain of 2.4 per cent.

MCX Silver futures closed the week at ₹38,707 per kg, just right above our target of ₹38,700, making a profit of 6 per cent.

This week again, it looks like the rupee may weaken further and move towards 63 levels. So, buying in declines can work this week too in gold and silver futures.

MCX Gold (₹27,209) can move up to ₹28,000 if it cuts past the resistance at ₹27,400. If rupee supports, the contract can even go higher to ₹28,400 this week. However, if prices move south on negative news, if any, the contract may drop to test the support at ₹26,600.

On breaching the support, the contract will stop only at ₹26,000. MCX Silver (₹38,707) has a strong resistance at ₹39,000 levels.

If this is cut, the contract can move to ₹41,300 this week. The support is at ₹36,500, to a target of ₹35,000.

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