Investors pile up dollar, abandon gold

Strong US economic data and hopes of interest rate hike make dollar more attractive

Strong economic data from the US saw gold prices drop sharply last week to hit $1,281/ounce, down 1.8 per cent.

The US Commerce Department said that the number of building permits issued in July increased by 8.1 per cent to 1.052 million units from 9,73,000 in June. It also said that the US housing starts soared by over 15 per cent in July, much above the market expectations of an increase of 8.6 per cent.

The FOMC minutes released on Wednesday showed that US officials were optimistic about the recovery in the job market. As this hinted at a sooner than expected increase in interest rates, gold got a thumbs-down from investors.

Expectation of interest rate hike in the US made investors turn to dollar-denominated securities, thus strengthening the dollar. The dollar index, which measures the value of the greenback against six major currencies, crossed the 82-mark and closed the week at 82.336.

In the precious metals pack, other commodities too lost sheen. Silver dropped. Platinum closed at $1,421.8, down 2.3 per cent.

However, gold saw some renewed interest from ETF buyers. Gold-backed exchange traded funds saw holdings rise to 800.08 tonnes, from 795.6 tonnes in the previous week.

In the domestic market, gold prices declined sharply as rupee too appreciated against the greenback. Spot gold (of 24 karat) prices dropped to ₹2,769/gram, down over 2 per cent. Though shoppers were happy with the price correction, with the festival season set to start, investors were disheartened.

Cues to watch

Geopolitical concerns were off the radar of investors last week. The EU kept mum about its review of sanctions on Russia. Oil prices plunged further, turning precious metals that are a tool to protect against inflation, unattractive.

It looks like there is more pain to come for gold. With the stronger US economic data, and the Fed mulling a rate hike next year, the dollar can move higher, sending gold lower. This week, there are a lot of key economic releases in the US.

It starts with the new home sales data on Monday followed by the durable goods order on Tuesday; on Thursday, the weekly jobless claims data and GDP numbers. This will be the second estimate of growth for the April-June period. The preliminary estimates that were released on July 30 reported the growth at 4 per cent. In the second estimate, analysts expect growth to be higher or maintained at the same 4 per cent levels.

In the domestic market, gold investors need to follow the rupee’s move closely. MCX Silver dropped to ₹41,955, down 3 per cent for the week. MCX gold declined to ₹27,813, down 2.8 per cent. Rupee crawled up to 60.47 against the dollar from 60.77 in the previous week. Fall in oil prices and continued flows into the equity market, strengthened the currency. After last week’s correction, gold prices in the international market look weak.

On the charts

Gold is likely to move down further towards $1,250/ounce levels. However, before that, it needs to break the support at $1,269. If this level is not breached, price may climb up to $1,290/$1,295 again. MCX gold moved up towards the resistance zone of ₹28,600-28,800 initially. It then slipped, pressured by the appreciating rupee.

It broke the support we had specified in this column last week (₹27,800) and touched a low of ₹27,700. On Friday, it however inched a little bit higher and closed at ₹27,813. This week, the contract may probably move a little further down towards ₹27,500 and ₹27,000 levels. On the upside, the targets are ₹28,000 and ₹28,400. MCX Silver plunged very sharply, breaking both the first and second supports.

In the next few days, it may move down to ₹41,700 and ₹41,530. Any support from a depreciating rupee may take the contract higher to ₹42,300 and ₹42,900.

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