Gold breaches a key hurdle

There are early signs that the recent downtrend has come to an end

As expected, gold rose past the key resistance level of $1,210 per ounce last week. Global spot gold prices surged to a high of $1,226 an ounce on Thursday. Though prices dipped slightly on Friday, gold closed the week on a positive note at $1,217 per ounce, up 1.1 per cent for the week.

Global equity markets’ witnessing a strong sell-off, coupled with a sharp fall in the US dollar index, helped gold gain sheen. The sudden and sharp fall in the US equity markets on Wednesday jolted global bourses. The Dow Jones Industrial Average tumbled 831 points (3.1 per cent) on Wednesday, stretching its fall on Thursday by another 2 per cent (546 points).

The US dollar index failed to breach 96, sliding over one per cent from its high of 96.15 to touch a low of 94.95. The index did, however, recover some of the loss on Friday to close the week at 95.22, down 0.42 per cent for the week. The sharp fall both in global equities and the dollar index helped gold move to safe-haven territory, and surge above the key resistance level of $1,210 last week. If the sell-off in the global indices extends in the coming week as well, gold will sustain above $1,210 and rise further.

On the domestic front, the gold futures contract on the Multi Commodity Exchange surged in tandem with global prices. Indeed, the gains in the domestic markets were higher as the rupee fell to a record low of 74.48 against the dollar before recovering towards the end of the week. MCX-Gold futures contract closed the week on a strong note at ₹31,846 per 10 g, up 2.2 per cent.

Dollar outlook

The US dollar index has been stuck in a sideways range between its support at 94.80 and resistance at 96.15 over the past couple of weeks. A strong breakout on either side of 94.80 or 96.15 will determine the next move. If the index declines below 94.80, a fall to 94.20 or 94 is possible.

Such a fall will take gold prices even higher. If the dollar manages to decisively rise past 96.15, it will surge to 97 or even higher.

Gold outlook

The short-term outlook for gold is positive. Global spot gold ($1,217 per ounce) has immediate support at $1,213 and then a cluster of supports poised between $1,210 and $1,200. Though an intermediate dip to $1,213 or $1,210 cannot be ruled out, the downside may be limited. An eventual bounce-back will take gold higher to $1,235 or $1,240 in the short term. An inability to breach $1,240 can trigger a pull-back to $1,220 or $1,215 thereafter. But a strong break above $1,240 will see the upmove extending to $1,260. On the domestic front, the outlook for the MCX-Gold (₹31,846 per 10 g) futures contract is bullish. Significant support is in the ₹31,500-31,450 region, which is likely to limit the downside in the near term. The next key support is at ₹31,000. As long as the contract trades above these supports, a rally to ₹32,500 and ₹33,000 is likely in the coming weeks.

Trading strategy

Traders with a medium-term perspective can go long at current levels and also accumulate on dips at ₹31,600 and ₹31,300. Stop-loss can be placed at ₹30,900 for the target of ₹33,000. Revise the stop-loss higher to ₹31,950 as soon as the contract moves up to ₹32,500.

Silver underperforms

Silver continued to underperform gold for the second consecutive week. Global spot silver prices tumbled over 2 per cent, and made a a low of $14.24 per ounce. Prices, however, recovered to close at $14.58 per ounce, down 0.4 per cent for the week. On the domestic front, the MCX-Silver futures contract fell sharply early in the week, reaching a low of ₹38,485 per kg. The contract recovered towards the end of the week, closing at ₹38,918 per kg, down 0.91 per cent.

Silver outlook

The near-term outlook for silver is mixed. Global spot silver ($14.58 per ounce) could remain in a sideways range between $14 and $15 for some time. A breakout on either side of $15 will decide the next move. A strong break above $15 will take prices higher to $15.35 and $15.60.

On the other hand, a strong break below $14 can drag the prices lower to $13.65 thereafter.

However, the outlook for the MCX-Silver (₹38,918 per kg) futures contract remains positive. The bounce-back from the low of ₹38,485 indicates that the uptrend from September will remain intact.

Resistance is at ₹39,400, which is likely to be tested in the near term.

An inability to break this hurdle can drag the contract lower to ₹38,500 and ₹38,300 levels. But a strong break above ₹39,400 can initially take the contract higher to ₹40,200.

A break above ₹40,200 will see the upmove extending to ₹41,000 in the coming weeks.

Trading strategy

Medium-term traders who have taken long positions in MCX-Silver at ₹39,000 and ₹38,650 can hold them.

Retain the stop-loss at ₹37,850 for the target of ₹41,000. Revise the stop-loss higher to ₹39,300 as soon as the contract moves up to ₹39,700.

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