Gold may rise further if dollar sinks

Investors may have to watch dollar movements very closely from here on

Gold prices ended flat last week. From a high of $1,352.7/ounce on Wednesday, gold prices dropped to $1,327.8/ounce by Friday following comments from a Federal Reserve Official that the central bank is on course to do the second rate hike soon.

The Fed funds futures on Friday showed that the market sees a 30 per cent probability of a rate hike in September (over half the market, however, still sees the next rate hike coming only in December).

SPDR Gold Trust, the largest gold ETF in the world, saw holdings decline from 952 tonnes on Tuesday to 939.94 tonnes on Friday.

Prices of other precious metals, including platinum ($1,062.4/ounce) were lower by 0.14 per cent and silver ($19.05/ounce) down 2.05 per cent, ended in the red.

Cues to watch

There are a few critical data releases in the US in the later part of this week. On Thursday is the August month’s retail sales data. In July, retail sales (excluding revenue from sales of automobiles) were down 0.3 per cent. So, if August data too disappoints, showing weak consumer spending, it may turn negative for the already fragile dollar.

Last week, the US dollar index closed 0.5 per cent lower following weak jobs data. Data on industrial production is also set to be released on Thursday. Industrial production is expected to drop by 0.2 per cent over July following two months of strong gains. On Friday is the most crucial Consumer Price Index data. Inflation is expected to have risen 0.1 per cent in August over July and core CPI (less food and energy) is expected to be 0.2 per cent higher.

Gold investors may have to watch dollar movements very closely from here on. Charts show the possibility of a trend reversal in US dollar as the drop in the greenback has intensified in the recent weeks.

Historically, all the best periods for gold have been times when the US dollar was on a downtrend.

So, if the US dollar weakens further in the coming weeks and drops below 94-93 levels, gold may get a leg-up. In such a scenario then, the yellow metal may move up above $1,355 levels, targeting $1,375.

Domestic market scenario

Physical market demand for gold in the domestic market continues to be lacklustre. In the spot market, gold prices were quoting at $21/ounce below the international price.

A good monsoon and upcoming festival season, though, are expected to lift demand soon.

The gold futures contract in the domestic commodity exchange, however, closed in the green last week.

The MCX gold contract ended at ₹31,217 on Friday, up 0.96 per cent for the week.

MCX silver, too, moved up. The contract closed at ₹46,194, up 1.57 per cent, in contrast to the downtrend in international silver prices.

The upbeat momentum in bullion contracts in the domestic market surprised many, as rupee too was strong. The currency closed at 66.67 against the US dollar, up from 66.82 last week. Both these contracts may continue to see further gains this week unless checked by any negatives news developments.

MCX Gold may try to move up further to ₹31,500 levels if it manages to cross the resistance around 31,400-31,450. On the downside, supports for the contract are at ₹30,500 and ₹30,000.

The MCX Silver contract looks very bullish on the charts, breaking the resistance around ₹46,350 with ease last week. The contract touched a high of ₹47,694 on Tuesday. This week, the contract may rally up again and test ₹47,600 levels. If the buying momentum continues, the contract may move up above ₹48,000. Supports are at 46,000 and ₹45,000.

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