Commodity Analysis

Gold recovers after US tariff announcement

Gurumurthy K | Updated on March 04, 2018 Published on March 04, 2018

Risk aversion increases demand for safe haven, pushing up gold prices

Gold prices gyrated in the past week. The global spot gold prices rose to a high of $1,341 per ounce initially and tumbled about 3 per cent from there to make an intra-week low of $1,303. The prices however managed to reverse sharply higher from this low, recovering most of the loss during the week. The yellow metal has closed at $1,322 per ounce, down 0.45 per cent for the week.

The US President Donald Trump’s announcement on import tariffs for steel and aluminum helped in triggering a reversal in gold prices. A 25 per cent import tariff on steel and 10 per cent on aluminum is expected to come into effect as early as this week. This sparked fears in the market that it could begin a trade war between the US and the rest of the world. As a result, markets turned risk averse and, in turn, gold bounced back sharply as it gained safe haven status.

Silver continued to hover broadly around $16.5 for the fourth consecutive week. The global spot silver prices fell to a low of $16.17 per ounce on Thursday and bounced back from there to close on a flat note at $16.52 per ounce.

On the domestic front, gold and silver futures contracts on the Multi Commodity Exchange (MCX) moved in tandem with the global spot prices. The MCX-Gold futures contract fell to a low of ₹30,119 per 10 gm and bounced back on the final trading day, recovering most of the week’s loss. The contract closed at ₹30,448 per 10 gm, down 0.2 per cent.

The MCX-Silver futures contract tumbled to a low of ₹37,450 per kg and reversed higher from there to close the week 0.2 per cent lower at ₹38,335 per kg.

Dollar loses momentum

The US dollar index rose above the crucial resistance level of 90.55 and made a high of 90.93. However, the index failed to sustain higher and had come-off from there giving back most of the gains made during the week. It has closed at 89.98. Support is in the 89.65-89.50 region, which can be tested early this week. If the index declines below 89.5, it can fall further towards 89 or even 88.5 thereafter. Such a fall will help in pushing the gold prices further higher. But if the dollar index manages to reverse higher from the 89.65-89.5 support zone, it can bounce back again targeting 90.5 and 91 levels.

Gold outlook

The support in the $1,310-$1,300 region has held well as expected. The global spot gold ($1,322 per ounce) price has bounced back sharply after testing this support zone last week. This indicates that the $1,300-$1,370 sideways range within which gold is oscillating since January remains intact. Immediate support is at $1,315 and resistance is at $1,325.

A strong break above $1,325 can take the prices higher towards $1,335 or $1,340. Further break above $1,340 will then pave way for the next targets of $1,360 and $1,370. The outlook for gold will turn negative only if it breaks below $1,300, which looks unlikely at the moment.

The MCX-Gold (₹30,448 per 10 gm) is sustaining above the key psychological support level of ₹30,000. The contract has reversed higher after making a low of ₹30,119 last week. As long as the contract sustains above ₹30,000, the outlook will remain positive and a rally to ₹31,000 or ₹31,100 is likely in short-term.

Inability to breach ₹31,100 can pull the contract lower towards ₹30,000 again. In such a scenario, a range bound move between ₹30,000 and ₹31,100 can be seen for some time. If the contract manages to breach ₹31,100 decisively, it can gain fresh momentum. Such a break will increase the likelihood of the contract targeting ₹32,000 or even higher levels over the medium-term.

The outlook will turn negative only if the MCX-Gold futures contract breaks below ₹30,000. Such a break, though less probable can drag the contract lower to ₹29,600 or ₹29,450.

Silver outlook

The outlook for global spot silver ($16.5 per ounce) remains mixed as it continues to hover around $16.5 over the last four weeks. Support is at $16.25 and resistance is at $17.

A breakout on either side of $16.25 or $17 will decide the next trend. A break below $16.25 can take silver lower to $15.75. On the other hand, it will gain momentum and can target $17.5 and $17.75 if it breaks above the hurdle at $17 decisively.

The immediate outlook for the MCX-Silver (₹38,335 per kg) is unclear. Though the support at ₹37,450 has held well and the contract bounced back sharply, clusters of resistances are poised in between ₹38,500 and ₹39,000. The contract has to break above ₹39,000 decisively to gain fresh momentum. Such a break will take the contract higher to ₹40,000 in the short-term. But inability to break above ₹39,000 can trigger a pull back move towards ₹37,450 again and keep the contract range-bound between ₹37,450 and ₹39,000 for some time.

The outlook will turn negative if the contract breaks below ₹37,450 decisively. Such a break will increase the likelihood of the contract falling toward ₹36,500.

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