Commodity Analysis

Gold likely to remain under pressure

Gurumurthy K | Updated on July 02, 2018 Published on July 01, 2018

A crucial support at $1,238 per ounce may halt the current downtrend

Gold prices continued to take a beating for the third consecutive week. The global spot gold prices have tumbled 3.5 per cent over the last three weeks. Gold initially inched higher in the past week to make a high of $1,272.6 per ounce on Monday. However, it failed to sustain higher and tumbled from those levels to make a low of $1,246 on Thursday. The prices, however, managed to bounce back slightly from the lows on Friday to close at $1,252.6 per ounce, down 1.4 per cent for the week.

On the domestic front, the gold futures contract on the Multi Commodity Exchange (MCX) remained in a narrow range between ₹30,450 and ₹30,740 per 10 gm almost all through the week until Thursday. The Indian rupee’s weakening to its all-time low of 69.09 on Thursday helped offset the sharp fall witnessed in global prices. But the recovery in the rupee dragged the contract lower to ₹30,356 on Friday, before closing the week at ₹30,432 per 10 gm, down 0.6 per cent.

Dollar reverses

The US dollar index falling sharply by about a per cent on Friday, aided the global spot gold prices to recover slightly in the final trading sessions of the week. The dollar index was trading on a strong note all through the week. It surged to a high of 95.53, but failed to sustain higher, and reversed sharply lower, giving back all the gains made during the week. The index has closed at 94.47.

The level of 95.5 has restricted the upside in the index for the second consecutive week. A strong break and a decisive close above this hurdle is now needed for the index to gain fresh momentum. Such a break can take the index higher to 96. A further break above 96 will then pave way for the next targets of 97.5 and 98. Such a rally in the dollar index may continue to keep gold under pressure.

However, on the charts, the possibility of the dollar index breaking above 95.5 in the near term looks less. This indicates that a further sharp fall in gold prices could be limited in the coming days.

Key supports for the dollar index are poised at 94.2 and 93.7. If the index manages to sustain above these supports, a range-bound move between 93.7 and 95.5 is possible for some time. But a strong break below 93.7 may take the dollar index to 92.8. In such a scenario, gold may get a breather and bounce back.

Gold outlook

Though the global spot gold ($1,252.6 per ounce) prices have moved higher on Friday, the upside is expected to be restricted in the short term. A strong resistance is poised at $1,261, which can cap the upside in the near term. Though a test of this hurdle is likely in the near-term, a break above it is less probable. A strong break above $1,261 is needed for the downside pressure to ease. If gold manages to breach $1,261 decisively, a relief rally to $1,270 and $1,280 is possible.

But as long as gold remains below $1,261, the possibility is high of it breaking below $1,245 and falling to $1,240 or $1,238. The region between $1,240 and $1,238 is a strong long-term support which has the potential to halt the current downtrend. The price action around this support zone will need a close watch in the coming days.

On the domestic front, the near-term outlook for the MCX-Gold (₹30,432 per 10 g) is negative. Immediate resistance is at ₹30,500 and the next strong resistance is in the ₹30,775-30,850 zone. The contract can fall to ₹30,000 or ₹29,800 in the coming days. If the contract reverses higher from this ₹30,000-29,800 support zone, a corrective rally to ₹30,750 is possible. But a strong break below ₹29,800 will increase the downside pressure. Such a break can drag the MCX-Gold futures contract to ₹29,500 or even ₹29,000 thereafter.

Silver underperforms

Silver prices took a sharper fall than gold last week. The global spot silver prices tumbled over 2 per cent last week. The sharp fall has dragged the prices below the key support level of $16.20 per ounce in the past week.

This support level was limiting the downside in silver for a prolonged period of time since February. The prices have closed at $16.12 per ounce. An important support is in the $15.95-$15.90 region. If silver manages to sustain above this support and reverses higher in the coming days, the downside pressure would ease.

In such a scenario, a corrective rally to $16.25 or even $16.50 is possible. But if silver declines below $15.90, prices can fall further towards $15.6 in the short term.

On the domestic front, the losses in the MCX-Silver futures contract was limited on the back of the weak rupee. The MCX-Silver contract fell 1.4 per cent last week and closed at ₹39,228 per kg. Immediate resistance is at ₹39,400. A strong break above ₹39,400 will ease the downside pressure and can take the contract higher to ₹40,000 in the near term.

But, an inability to breach ₹39,400 will keep the possibility high of the contract declining below the psychological support level of ₹39,000. The next targets are ₹38,700 and ₹38,350. Cluster of important supports between ₹39,000 and ₹38,350 may aid in limiting the pace of the current downtrend. A further fall below ₹38,350 is unlikely.

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