Gold to melt as currency prop goes

The rally in the rupee is weakening domestic gold prices rapidly. Further strength in the currency will extend this decline



Gold hit a low of $1,285.8 an ounce on Friday and closed at $1,295 an ounce for the week, down 3 per cent.

The improving economic outlook in the US and firm US dollar weighed on gold. Silver ended the week 2 per cent down at $19.4/ounce. Platinum lost 1.8 per cent to close at $1,408.8 despite disruption in production in mines in South Africa. In the final estimate, fourth quarter US GDP released last week was revised upwards to 2.6 per cent from 2.4 per cent earlier. Also, the jobless claims for the week ending March 22 fell surprisingly by 10,000 to 311,000. Analysts had expected it to rise by 4,000 to 325,000. With this, the greenback strengthened.

The euro, which started the week at 1.3794 versus the dollar, ended at $1.3752; the intra-week high was $1.3876. Investors grew bearish on euro as data showed that Germany slowed in March. This flagged off worries of European Central Bank resorting to monetary easing, which will in due course weaken euro.

Demand for gold in the physical market dropped last week, with SPDR Gold Trust recording a drop in holdings. The fund’s holdings dropped by over four tonnes to 816.97 tonnes last week. Gold demand in China has also been weak. The flash Markit/HSBC China Purchasing Manager index fell to an eight-month low of 48.1 in March (against the expected 48.7). The reading for February was 48.5.

Cues to watch

Chinese policymakers are considering investment in infrastructure and other stimulus measures to give a fillip to growth. This can become a sentiment changer in the market. China is the top gold importer and positive news from the country may bring gold bulls on the stage again. But a strong rally might not be possible just yet.

The metal will react to further sanctions, if imposed, on Russia and economic data from the US and China. In a press conference last week, the US President and EU officials said the sanctions on Russia will increase if Russia continues on its current course on Ukraine. This time, markets expect the West to target the Russian energy sector which may have a greater impact. Next week, the US data on PMI Service index will be released on Thursday. On the same day, data on jobless claims will also be reported. On Friday, April 4, a set of labour market indicators is expected that will gauge the country’s employment situation.

Domestic investors

The rupee closed at 59.89 versus the dollar on Friday, gaining 1.7 per cent for the week on large FII flows. The intra-week low was recorded on Friday at 59.68. But with the Reserve Bank of India intervening and buying US dollars, the rupee gave up some gains. However, in the run up to the elections more hot money is expected and this can strengthen the rupee against the greenback and knock out returns on your gold investments. Last week, gold futures on MCX declined sharply hit by the strong rupee. MCX gold slid 4.5 per cent to ₹28,380. MCX Silver dropped 4 per cent. Domestic market gold investors have to keep an eye on the rupee.

Less geopolitical tensions and some profit booking saw gold slip below $1,300/ounce last week. However, if the metal holds above the support of $1,280, then, bulls may return. A move above $1,326 may see the rally resuming and the metal hitting $1,339 and $1,351. On the downside, targets are $1,265 and $1,243. MCX gold is at a key short-term support.

In the coming days, if prices weaken further to ₹28,000, there may be a drastic fall. Gold can then halt for a brief period at ₹27,247 and then slip further to ₹24,900. MCX Silver is also weak on the charts. Continued selling in the coming week can take it to ₹40,700 and then ₹39,500. For a trend reversal, the price needs to cut ₹45,000. The next resistance is at ₹48,300.

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