Commodity Analysis

Gold likely to fall further

Gurumurthy K | Updated on June 05, 2018 Published on June 03, 2018

Inability to breach $1,310 last week leaves the outlook bearish

As expected, the resistance around $1,310 per ounce capped the upside in gold all through last week. The global spot gold price oscillated in a narrow sideways range below $1,310 for most part of the week. Surprisingly, neither the weak dollar nor the concerns of trade war after the US imposed import tariffs on Mexico, Canada and the European Union helped gold gain strength and breach above $1,310.

The prices, which were oscillating around $1,300 almost all through the week, came under pressure on Friday after the strong US jobs data release. Gold fell sharply below $1,300 after the data release, to close the week 0.7 per cent lower at $1,293 per ounce.

Inability to break above $1,310 in spite of the dollar weakness and a subsequent sharp fall at the end of the week indicates that further fall in gold is on the cards in the coming days.

Silver, however, remained relatively stable. The global spot silver prices traded in a narrow sideways range between $16.32 and $16.60 per ounce and closed at $16.41 per ounce, down 0.6 per cent for the week.

Rupee impact

The Indian rupee’s strengthening against the US dollar kept the gold and futures contract under pressure on the domestic front. The rupee fell to test 68 intra-week, but reversed sharply higher from there, recovering all the loss made, and closed at 67.06, up 1 per cent for the week. The strong rupee sharply dragged the gold and silver futures contracts on the Multi Commodity Exchange (MCX) lower in the past week. The MCX-Gold contract fell, breaking below a crucial support level of ₹30,800 per 10 gm. The contract closed at ₹30,546 per 10 gm, down 2 per cent for the week.

The MCX-Silver contract, on the other hand, broke below the psychological ₹40,000-per-kg mark and closed at ₹39,547 per kg. The contract was down 1.8 per cent for the week.

Dollar rebounds

The dollar index (94.15) was volatile in the past week. The index surged initially to test 95 levels as expected. But, it failed to sustain higher, and reversed sharply to make a low of 93.7. However, good jobs data on Friday helped the index rebound above 94 again. The US unemployment rate fell to an 18-year low of 3.8 per cent. The non-farm payrolls increased 223,000 in May as against an expected increase of 188,000.

The immediate outlook for the index is mixed. Inability to sustain above 94 can take the index lower to 93.6 — a crucial support level. A break below 93.6, though unlikely, may drag the index further lower to 93. On the other hand, as long as the index remains above 94, a rise to revisit 95 is possible. A strong break above 95 will see the upmove extending to 95.5 and 96.

Gold outlook

The short-term outlook for the global spot gold ($1,293 per ounce) is bearish. The 200-day moving average resistance at $1,308 has capped the upside very well in the past week, and gold has reversed sharply lower after testing this hurdle.

The possibility of remaining below $1,300 is high. A fall to $1,280 or $1,275 can be seen in the coming days. A strong break below $1,275 will increase the likelihood of the fall extending to $1,265 and $1,260.

The region between $1,265 and $1,260 is a strong support, which may halt the current downtrend. A further fall below $1,260 looks unlikely at the moment.

As mentioned last week, a strong break above $1,310 is needed for the outlook to turn completely positive. Such a break will ease the downside pressure, and can take the prices higher to $1,325. A further break above $1,325 will then increase the likelihood of the prices revisiting $1,350 levels thereafter.

The sharp fall below ₹30,800 has turned the outlook for MCX-Gold (₹30,546 per 10 gm) also negative. The contract can fall to ₹30,150 or even ₹30,000. A bounce from ₹30,000 can keep the contract range-bound between ₹30,000 and ₹30,800 for some time. But a break below ₹30,000 will increase the likelihood of the contract tumbling to ₹29,500 thereafter.

Silver outlook

The global spot silver ($16.41 per ounce) has remained mixed and range-bound between $16.25 and $16.75 per ounce over the past few weeks.

A breakout on either side of $16.25 or $16.75 will decide the next move. A strong break above $16.75 can take silver higher to $17.25. On the other hand, a break below $16.25 can take it lower to $16 and $15.75.

On the domestic front, the MCX-Silver (₹39,537 per kg) futures contract has resistance in the ₹39,700-₹39,800 region. As long as it trades below this resistance zone, a fall to ₹39,000 or ₹38,900 is likely in the coming days.

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