Commodity Analysis

Gold recovers on weak equities and dollar

Gurumurthy K | Updated on May 26, 2019 Published on May 26, 2019

Will continue to consolidate between $1,265 and $1,300

Gold fell to test $1,270 per ounce, as expected, and remained stable in the initial part of last week. However, weakness in the equities and a sharp fall in the US dollar index towards the end of the week helped it gain strength.

The yellow metal surged towards the end of the week, breaking above the key level of $1,280, and hit $1,284.9 per ounce, up 0.6 per cent for the week.

Silver, on the other hand, held well above its intermediate support region of $14.40-14.35 per ounce and bounced higher in the later part of the week. The global spot silver surged, breaking above the key resistance level of $14.50 and made a high of $14.65. It closed at $14.56 per ounce, up 1.1 per cent for the week.

On the domestic front, the gold and silver futures contract on the Multi Commodity Exchange (MCX) underperformed the global prices. The rupee’s strengthening against the US dollar weighed on the domestic prices.

Dollar and equities help

Increasing fears of the US-China trade war getting worse, which in turn could stall the global economic growth, weighed on the global equities last week. As a result, major indices fell. This, coupled with the strong downward reversal in the US dollar index helped gold gain sheen.

The US dollar index (97.6) fell sharply towards the end of the week. The index made a high of 98.37 on Thursday and reversed sharply lower, giving back all the gains. As long as the index remains below 98, there is a strong likelihood of it declining towards 97.3 and even 97 in the coming days. This could limit the downside in gold and push its prices further high.

The minutes of the US Federal Reserve meeting held earlier this month indicated that the central bank could keep the rates on hold for some time. This makes it interesting to watch if there is any change in stance of the Fed in its meeting scheduled for June 29.

Gold outlook

The support at $1,266 on the global spot gold ($1,284.93 per ounce) is continuing to hold well. This keeps the broader $1,265-1,300 sideways range intact. Within this range, intermediate supports are at $1,280 and $1,275. As long as gold sustains above these supports, a rise to $1,290-1,292 is possible this week. A strong break above $1,292 will increase the likelihood of gold moving further higher towards $1,297-1,300. At the moment, a rally beyond $1,300 looks less probable and the $1,265-1,300 range is likely to remain intact.

On the domestic front, the support around ₹31,200 has been holding well on the MCX-Gold (₹31,530 per 10 gm) futures contract. A strong support is in the ₹31,200-31,000 region. Even though a dip to ₹31,200 and ₹31,100 is possible, a break below ₹31,000 looks less probable. A bounce from this support zone can take the contract higher to ₹32,000 and ₹32,500 in the coming weeks.

Silver outlook

Silver ($14.56 per ounce) is currently witnessing a corrective rally. Though there is room for the corrective rally to extend, cluster of resistances in the broad $14.60-14.80 region is likely to arrest the pace of the up-move and halt the rally. As such, silver can reverse lower anywhere from the $14.60-14.80 resistance region and fall back to $14.40-14.35. An eventual break below $14.35 will drag silver lower to $14.

MCX-Silver (₹36,384 per kg) consolidated between ₹36,000 and ₹36,750 in the past week. If the contract continues to sustain above ₹36,000, a rise to ₹37,000 or even ₹37,500 is possible in the near term. But a strong break below ₹36,000 will bring renewed pressure on the contract and drag it to ₹35,500.

The writer is Chief Research Analyst at Kshitij Consultancy Services

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