Gold rallies smartly, targets $1,300

Swiss decision to abandon euro currency cap stokes demand for the yellow metal

It was a spectacular week for gold. The metal gained 4.6 per cent to close at $1,280/ounce. The decision by the Swiss National Bank to let the Swiss franc rise against the euro and to cut interest rates to a negative 0.75 per cent stoked demand for gold.

The US SPDR Gold Trust, the largest gold-backed exchange traded fund, saw its holdings rise by over 23 tonnes to 730.89 tonnes in the week.

The US dollar index moved to hit a high of 93.26, but closed at 92.5, only marginally higher from the previous week’s close. The rally in the Swiss franc and the disappointing numbers from the US pegged the greenback lower.

The US Commerce Department on Wednesday said that retail sales dipped 0.9 per cent in December — the biggest decline in the last 11 months, against forecasts of a 0.1 per cent fall. On Friday, the Federal Reserve released numbers on industrial production which showed 0.1 per cent decrease in December after a 1.3 per cent increase in November. In December, consumer prices also declined, according to data from the Labour Department. The CPI fell 0.4 per cent in December, the largest drop since December 2008.

Silver too gained sharply. The metal rallied 7.75 per cent to close at $17.78/ounce. Platinum moved up only 2.75 per cent to $1,267/ounce, and closed lower than the price of gold.

Indian gold investors too made some gains, but the stronger rupee capped the profit.

MCX gold futures contract rallied 3 per cent to close at ₹27,654 per 10 gm.

Cues to watch

The ECB is likely to announce measures to revive its stuttering economy this week. The currency and the precious metals’ market would be very volatile, so trade with caution. The Swiss National Bank’s move to scrap the cap against the euro just a week before the ECB’s QE could probably be because the central bank fears a far weaker euro after the QE (the bank holds large reserves of euro, and, a weak euro will hurt it). If the QE is really large, the euro may weaken further, giving more muscle to the dollar.

But dollar’s strength does not necessarily mean lower gold prices. Last week, when the Swiss central bank abandoned the cap to euro currency, safe haven demand saw both dollar and gold move up. There have been earlier instances too when gold and dollar have locked steps, and we have highlighted that in this column in the past.

This week, data on US housing starts will be released on Wednesday and jobless claims on Thursday. Friday will see the release of existing home sales.

There are doubts now on the mid-year rate hike by the Federal Reserve with the CPI dropping sharply in December — a positive for gold. The yellow metal is the only safe harbour for investors now, and it looks set to move higher. Data from the US CFTC (Commodity Futures Trading Commission) shows that speculators have increased their net long positions in gold in the week ending January 13 to the highest in five months.

On the charts

Gold price trend for the medium term is up now, with the floor at $1,240 levels. This week, the metal can move further to test levels of $1,290 and $1,310. But if dollar makes a sharp gain, the metal may consolidate around the present levels or move slightly lower and drift to $1,265 levels. The uptrend will reverse only if the metal moves down to cut $1,240.

Indian gold investors need to keep an eye on rupee.

The currency has been continuing to appreciate, despite the dollar holding strong. This is thanks to the inflows into the country’s equity as well as debt market, and the drop in crude oil prices. Rupee closed the week at 61.8 against the US dollar, from 62.3 in the previous week. Trade with stop loss on your long positions on MCX gold.

MCX gold rallied 3 per cent last week and closed at ₹27,654 after hitting a high of ₹27,790. There is a strong resistance at ₹28,000 levels. This level needs to be crossed for further gains. On the upside, the target is ₹28,500 and ₹28,800. If, however, prices drop, the first support is at ₹27,500, on breaching which the contract will hit ₹27,000. If it doesn’t hold even at ₹27,000, it can drop to ₹26,500. MCX Silver gained 6 per cent last week and closed at ₹39,061 per kg. This week, it can move further towards ₹40,000 and ₹41,300, if rupee supports and the contract is able to move above the resistance at ₹39,400 levels. On the downside, the targets are ₹38,700 and ₹36,850.

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