Commodity Analysis

Gold falls as dollar recovers

Gurumurthy K | Updated on February 25, 2018 Published on February 25, 2018

But strong support in the $1,310-$1,300 zone can limit the downside

Gold remained weak and prices fell over a per cent in the past week. A recovery in the US dollar kept the yellow metal under pressure all through last week.

Global spot gold prices fell sharply after touching a high of $1,351 per ounce and tumbled to a low of $1,321 on Thursday. The yellow metal, however, managed to bounce slightly higher from this low and closed at $1,328.8 per ounce.

Surprisingly, silver remained relatively insulated from the impact of the strong dollar last week. Global spot silver prices were stuck in a narrow range between $16.39 and $16.78 per ounce. They closed the week on a flat note at $16.53 per ounce.

On the domestic front, a weak rupee helped in limiting the losses in the gold and silver futures contract on the Multi Commodity Exchange (MCX). The MCX-Gold futures contract fell to a low of ₹30,387 per 10 gm on Thursday and bounced back from there to close the week at ₹30,509 per 10 gm.

The MCX-Silver futures contract, on the other hand, touched a low of ₹38,087 per kg before closing the week at ₹38,403 per kg.

Dollar recovers

The US dollar index sustained above 89 and edged higher, breaching the key resistance level of 89.5 in the past week. The region between 89.50 and 89.30 is a key support for the index in the near term.

As long as the index remains above this support zone, there is a strong likelihood of it rallying towards 90.50 in the coming days.

Such a rise in the index can pull gold prices further lower in the short term.

The level of 90.55 is a crucial trend-deciding resistance for the dollar index. If the index breaks and closes decisively above 90.55, it can gain bullish momentum.

Such a break will be an initial sign of a double bottom formation on the chart. A strong rise breaking above 91 will confirm this pattern and will take the index higher towards 92 in the coming weeks.

But inability to breach 90.55 and a pull-back thereafter can drag the index lower to 89 or even lower levels again.

As such, the price action in the dollar index around 90.55 will need a close watch in the coming days, which will be key in determining the next leg of move for the yellow metal.

Gold outlook

The global spot gold ($1,328.8 per ounce) has a cluster of resistances in between $1,335 and $1,340, which is likely to cap the upside in the near term. As long as prices remain below $1,340, a fall to $1,315 or even $1,310 is possible in the coming days. The region between $1,310 and $1,300 is a strong support for gold. A fall breaking below $1,300 is unlikely at the moment.

Gold is likely to reverse higher from the $1,310-$1,300 support zone. Such a reversal will have the potential to take the yellow metal higher towards $1,340 and $1,350 again.

As indicated last week, gold can broadly remain in a sideways range between $1,300 and $1,370. Within this range, the bias will be bullish for it to breach $1,370 and rally towards $1,400 and $1,450 levels over the medium and long term.

With regard to the immediate outlook for the MCX-Gold (₹30,509 per 10 gm), support is at ₹30,335 — the 21-day moving average. If the contract sustains above this support, a rally to ₹31,000 and ₹31,100 is likely in the coming days. But if it breaks below ₹30,335, a fall to ₹30,000 can be seen in the near term. A further fall below ₹30,000 is less probable at the moment. However, if the contract declines below $30,000, the downmove can extend to ₹29,600.

Silver outlook

Global spot silver ($16.53 per ounce) has been oscillating around $16.5 per ounce over the last three weeks. This leaves the near-term outlook unclear. Support is at $16.25 and resistance is at $17. A breakout on either side of these levels will determine the next move. A fall below $16.25 can drag silver lower to $15.75. On the other hand, silver will gain momentum and rally towards $17.5 and $17.75 if it breaks above $17 decisively.

MCX-Silver (₹38,403 per kg) futures contract has support at ₹38,000. As long as it sustains above this support, the possibility is high of it breaking above the resistance at ₹39,000. Such a break will see the contract rallying towards ₹40,000. On the other hand, the contract will come under pressure if it breaks below $38,000. In such a scenario, a fall to $37,450 is possible.

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