Gold recovers, but will it sustain?

Heightened tension in Ukraine border and recovery in consumption demand may help

Gold dropped to a four-year low of $1,132/ounce on Friday, but made a smart recovery later to close at $1,177.9/ounce, thanks to a weak jobs report in the US. The US Department of Labor reported that the country added 214,000 jobs in October.

This was lower than analysts’ expectation of an addition of 233,000 jobs and ushered in hopes of a delay in rate hike.

There was also a spurt in tensions in the Ukraine border that helped gold prices. Dozens of army tanks and vehicles from Russia are reported to have entered Ukraine’s eastern border on Friday. Silver and platinum, however, couldn’t manage a recovery.

Silver closed the week at $15.7/ounce, down 2.7 per cent. Platinum closed at $1,217/ounce, lower by 1.7 per cent over the previous Friday’s close.

The US dollar index touched a high of 88.19 on Friday despite a weak report from the Labor Department. At close, the index was at 87.64.

SPDR Gold Trust, the largest gold-backed exchange traded fund, continued to see outflows. On Friday, the fund’s holdings stood at 727.15 tonnes, down from 741.20 tonnes in the previous week.

Cues to watch

One reason for the correction in gold prices last week was also the Republican Party’s win in the local elections in the US. With the Republicans seen as more business friendly and holding a hawkish stance on interest rates, the expectation of interest rates moving higher sooner than scheduled grew, pushing gold prices lower.

The US dollar strengthened against most currencies including the yen and the euro, taking cues from the elections.

This week, the economic calendar is light and there are no major data releases in the US. The usual jobless claims data will be released on Thursday, and the statistic on retail sales on Friday.

So, if there is news of increase in geopolitical tensions, or if the dollar loses some steam on profit taking, gold prices may move up. India and China — the two large markets for jewellery where consumers lap up gold whenever prices correct — have been subdued this time. If buying interest picks up in these markets, it will offer some support to gold prices.

Indian investors

Gold prices in the Indian market too dropped last week, but not to the level seen in the international market.

Last week, the rupee dropped to a low of 61.67 against the US dollar to close at 61.63. The gold futures contract on MCX fell to ₹25,932, down 0.7 per cent. The intra-week low was ₹25,164. But for a weak rupee, gold prices would have dropped even more. MCX Silver closed the week at ₹34,796, down almost 3 per cent.

The rupee’s short-term outlook is negative, going by the trends in the technical charts. The rupee’s weakness means Indian gold investors will face lower losses than their US counterparts. So, consumers who are sitting on the sidelines can now go ahead with their purchases.

Chart levels

Gold’s sharp recovery on Friday adds to some optimism. If the price continues to go up on Monday again, bears will try to cover up their shorts, resulting in some further upside in prices.

If, however, it is successful in crossing the $1,183 mark, there can be more upside. Bears, however, need to break $1,100 to take gold significantly lower.

MCX Gold may try to move above ₹26,000 levels this week if the rupee helps by staying weak. If ₹26,000 is cut, the contract may move to ₹26,250 and ₹26,700. On the downside, the targets would be ₹25,500 and ₹25,000.

The MCX Silver contract looks weak in the charts. The drop below ₹38,500 — which served as a strong support for the contract for a long time — has made the outlook quite weak.

The declining trend in the prices may continue this week too and take the contract to a target of ₹34,000 and ₹33,500. Upside if any may see the contract moving to ₹35,000 and ₹36100.

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