Gold glitters on increasing risk aversion

As increasing fear of a slowdown and recession triggers a sell-off in risky assets

Gold rallied sharply towards the end of last week after trading subdued in the initial part of the week. The global spot gold was threatening to fall to $1,270-1,265 per ounce as it fell below the key support level of $1,280. But the yellow metal reversed sharply higher and surged to test the psychological level of $1,300 after making a low of $1,275. Increasing concerns of the global economy slowing down and fear of a fresh recession helped gold gain safe-haven status and triggered the sharp upward reversal. The global spot gold closed the week at $1,305.58 per ounce, up 1.6 per cent for the week.

Silver, on the other hand, recovered sharply after tumbling about 1.8 per cent intra-week. The global spot silver made a low of $14.30 per ounce and bounced sharply from there, recovering all the loss. Silver closed the week marginally higher by 0.2 per cent at $14.59 per ounce. On the domestic front, the gold and silver futures contract on the Multi Commodity Exchange (MCX) moved in tandem with the global prices. The MCX-Gold futures contract was up 1.8 per cent and closed at ₹32,098 per 10 gm. The MCX-Silver futures contract has closed at ₹36,449 per kg, up 0.2 per cent for the week.

Mounting fears

The fear of the global economy slowing down and the possibility of seeing another recession have been increasing in the market. The US’ recent move to levy tariffs on Mexican imports has added fuel to the concerns. As a result, risky assets such as equities witnessed a strong sell-off and, in turn, safe assets such as bonds rallied sharply, thereby pulling down the yields sharply. The Dow Jones Industrial Average was down 3 per cent and Japan’s Nikkei 225 was down 2.4 per cent. This helped gold gain the safe-haven status and triggered a sharp rally in its prices towards the end of the week.

Rate-cut expectation

The fear of a slow down and a recession is increasing the expectation that the US Federal Reserve will cut rates. This is giving additional support for gold prices to move higher. The Fed has indicated that the rates would broadly remain unchanged for the rest of the year but has not signalled anything regarding a rate cut. Given the current market situation, it will be interesting to watch the Fed meeting scheduled for June 19. Any new hint from the Fed to cut rates will be a positive for gold.

Gold outlook

The strong surge and a decisive close above the psychological level of $1,300 is a positive for gold ($1,305.58 per ounce). The immediate support is at $1,297 and then the next significant one is at $1,292. These supports are likely to limit the downside in the coming days. Though there is resistance near $1,310, gold is likely to breach it and rally towards $1,325-1,330 this week.

On the domestic front, the strong rise past ₹31,500 last week keeps the broader ₹31,230-32,550 sideways range intact for the MCX-Gold (₹32,098 per 10 gm) futures contract. Within this range, the outlook is bullish for the contract to test ₹32,500 — the upper end of the range — in the near term. A strong break above ₹32,550 will boost the momentum and take the contract higher to ₹33,000 and ₹33,500. But a pull-back from ₹32,500 will keep the sideways range intact and drag the contract lower to ₹32,000 and ₹31,500 levels again.

Silver outlook

Unlike gold, silver ($14.59 per ounce) is looking mixed from a near-term perspective. Key resistances are poised at $14.70 and $14.80. Only a strong break above $14.80 will turn the outlook bullish. But such a strong rise looks less probable. So, as long as silver remains below $14.80, it could underperform gold and fall to $14.30-14.25 again.

The MCX-Silver (₹36,449 per kg) has resistances at ₹36,800 and ₹37,000. Though these resistances can be tested in the near term, only a break below ₹37,000 will turn the outlook bullish. The targets above ₹37,000 are ₹37,200 and ₹37,700. On the other hand, if the contract reverses lower from ₹37,000, a pull-back move to ₹36,000 is possible again. In such a scenario, the overall downtrend will remain intact and the contract will remain vulnerable for a fall to ₹35,500 or even lower in the coming weeks.

The writer is Chief Research Analyst at Kshitij Consultancy Services

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