Commodity Analysis

Gold fails to act as safe haven

Gurumurthy K | Updated on June 18, 2018 Published on June 17, 2018

The yellow metal tumbles after US-China tariff war

After a silent start, gold prices suddenly turned violent towards the end of last week. The global spot gold prices were hovering in a narrow range between $1,290 and $1,300 per ounce until Wednesday even after the US Federal Reserve meeting. The Fed increased the rates by 25 basis points as expected, and indicated that there would be two more rate hikes for this year, instead of one hike as planned earlier.

Gold made a sudden spike to $1,309 on Thursday, but failed to sustain higher. The yellow metal tumbled, breaking below $1,300 on Friday, and closed at $1,279 per ounce, down 1.5 per cent for the week.

The sharp fall on Friday was triggered after the US announced 25 per cent tariff on Chinese goods worth up to $50 billion. China retaliated immediately with a levy of 25 per cent tariff on US goods worth $34 billion. Although the US dollar remained relatively stable after the tariff announcements, gold surprisingly failed to gain a safe-haven status.

On the domestic front, although the gold futures contract on the Multi Commodity Exchange fell sharply over a per cent on Friday in tandem with the global spot price, the loss for the entire week was marginal. Weak rupee aided in limiting itsloss. The MCX-Gold contract rose to a high of ₹31,424 per 10 gm, and fell sharplyto close the week on a flat note at ₹31,010 per 10 gm.

US dollar surge

The US dollar index had surged earlier on Thursday after the European Central Bank (ECB) announced that it will continue its bond-purchase programme beyond September, but with a reduced pace of €15 billion per month, and will end it in December this year. The market had expected the ECB to end its bond-purchasing programme by September. This triggered a sharp fall in the euro, which in turn saw the US dollar index surging from 93.5 to 95 on Thursday after the ECB meet.

The dollar index made a high of 95.15, and came off from there to close the week at 94.78. A key resistance is poised in the 95-95.15 region, which has held well and capped the upside in the past week. The 200-week moving average and trendline resistances are placed in this region. Inability to breach this hurdle can pull the dollar index lower to 94 or even 93.5, again. Such a fall may give some relief to gold and can push the yellow metal prices higher.

On the other hand, if the dollar index decisively breaks above 95.15, it can move further higher to 95.6 or even 96 in the short term. This in turn will keep gold under pressure and pull its prices further lower in the coming days.

The short-term outlook for the global spot gold ($1,278 per ounce) remains negative. However, an immediate support is at $1,275.

Gold outlook

If gold sustains above this support, a relief rally to $1,287 or $1,290 is possible in the near term. But further rally beyond $1,290 looks less probable at the moment.

A range-bound move between $1,275 and $1,290 can be seen for some time. But if gold decisively breaks below $1,275, it can come under more pressure. Such a break can drag it to $1,265 or even $1,255 in the coming weeks.

On the domestic front, the MCX-Gold (₹31,010 per 10 gm) has key supports at ₹30,750 and ₹30,500.

A dip to test these supports in the near term cannot be ruled out. But the outlook will turn negative only if the contract breaks below ₹30,500, which looks less probable. Resistance for the contract is at ₹31,550.

A bounce from ₹30,500 can take the contract higher to ₹31,550 in the short term. Inability to breach this hurdle can keep the contract range-bound between ₹30,500 and ₹31,550 for some time. But a strong break above ₹31,550 can boost the momentum. Such a break will take the MCX-Gold futures contract higher to ₹32,000 initially. A further break above ₹32,000 will see the contract rallying to ₹32,500 and ₹33,000 over the medium term.

Silver outperformed gold in the initial part of last week. The global spot silver surged over 3 per cent to make an intra-week high of $17.30.

The prices, however, sharply reversed lower from the highs and gave back all the gains made during the week. Silver closed the week at $16.57 per ounce, down 1.2 per cent lower for the week.

Resistance is at $16.70. As long as silver remains below this resistance, a fall to $16.2 is possible in the coming days. On the other hand, if silver manages to breach the resistance at $16.7, the downside pressure would ease. In such a scenario, silver can rally to $17.2 and $17.3 levels again.

MCX-Silver (₹40,199 per kg) surged in tandem with the global prices over 3 per cent intra-week, breaking above the key resistance level of ₹41,000. It made a high of ₹41,698 of Friday, but tumbled from there, giving back all the gains made, and closed marginally lower for the week at ₹40,199 per kg.

The level of ₹41,000 will act as a resistance again. While below ₹41,000, a fall to ₹39,700 is possible. A break below ₹39,700 will then increase the likelihood of the fall extending to ₹39,200.

On the other hand, the contract will regain momentum if it decisively closes above ₹41,000. Such a break will then pave way for a fresh rally to ₹42,000, or even ₹42,500.

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