Commodity Analysis

Gold gains momentum...

Gurumurthy K | Updated on June 09, 2019 Published on June 09, 2019

...as the case for rate cut from the US strengthens and the dollar weakens

The global spot gold prices have rallied to close in green for the third consecutive week. The yellow metal surged 2.7 per cent last week, breaking above the key level of $1,330 per ounce. It closed the week on a strong note at $1,340.8 per ounce.

Silver, on the other hand, moved up sharply, breaking above the key resistance level of $14.80 per ounce. The global spot silver surged to a high of $15.15 and came off slightly from there to close the week at $15.02 per ounce, up 2.9 per cent for the week.

The gold and silver futures contract on the Multi Commodity Exchange (MCX) moved in tandem with the global prices. The MCX-Gold surged 2.6 per cent and closed at ₹32,936 per 10 gm.

Two major factors aided the sharp rise in gold prices last week. The first was the strengthening case for the US Federal Reserve to cut rates. The second was the weakness in the dollar.

Rate-cut hopes

The strong rally in gold prices last week was boosted by the increasing chances of the Federal Reserve cutting interest rates this year. Fed Chairman Jerome Powell in his speech last week said the Fed will act as appropriate to sustain the expansion.

In addition to this, the weak US job numbers released on Friday further strengthened the case for a rate cut. The US non-farm payroll increased by 75,000 in May, much lower than the market expectation for a rise of 180,000.

It will be interesting to watch the outcome of the Fed meeting on June 19. Any confirmation from the Fed to cut rates this year will be positive for gold. But if the Fed fails to hint anything about the rate cut, gold prices may reverse sharply lower on the back of profit-booking.

Dollar weakens

The US Dollar index traded weak all through last week and aided the gold prices. Weak job numbers released on Friday dragged the index sharply below the key support level of 97.

The index closed at 96.54, down 1.2 per cent for the week. An immediate support is at 96.5, a break below which can drag the dollar index lower to 96-95.9 in the coming days. Such a fall in the index can help gold sustain higher. The US deciding to suspend its plan of levying tariffs on Mexican imports, which was supposed to come into effect from June 10, could give some breather on the trade war front. This could boost the equity markets. Though it may not have any negative impact on gold, a strong rally in equities, if seen, could slow down the pace of the up-move in gold. This is something to be watched.

Gold outlook

Gold is likely to sustain higher. The global spot gold ($1,340.8 per ounce) has strong support at $1,325, which can limit the downside in the near term.

As long as gold trades above $1,325, there is a strong likelihood of it moving higher to $1,355-1,360 in the coming days. The region around $1,360 is a crucial resistance.

Whether gold breaks above this hurdle or not will be key in deciding the direction of the next move.

On the domestic front, the prolonged sideways consolidation between ₹31,230 and ₹32,550 per 10 gm on the MCX-Gold (₹32,936) futures contract has come to an end.

The contract decisively rose above ₹32,550 last week.

The outlook is bullish. The contract can now target ₹33,500 and ₹33,700 in the coming days. The support is at ₹32,500.

Silver outlook

Silver ($15.02 per ounce) has an immediate resistance at $15.10. A break above it can take silver higher to $15.20-15.25.

However, a further decisive break above $15.25 is needed to gain strength and extend the rally to the next targets of $15.40 and $15.50. An inability to breach $15.25 can trigger a pull-back move to $15.00 and $14.90. The level of $14.80 is an important support. Silver will come under pressure again if it declines below $14.80, which looks less probable at the moment.

The MCX-Silver (₹37,344 per kg) has a key support at ₹37,750, which can be tested in the near term. But whether it manages to surpass this hurdle or not will decide the next move.

A break above ₹37,750 can take the contract higher to ₹38,000 and ₹38,500. But a pull-back from ₹37,750 can drag the contract lower to ₹37,000 or even ₹36,500 again.

The writer is Chief Research Analyst at Kshitij Consultancy Services

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