Commodity Analysis

Gold shows resilience despite strong dollar

Gurumurthy K | Updated on May 06, 2018 Published on May 06, 2018

The yellow metal is likely to retain its $1,300-$1,370 sideways range

Gold prices were down for the third consecutive week. Strong dollar is continuing to keep the bullion prices under pressure. The global spot gold prices tumbled about 2 per cent intra-week to test the psychological support level of $1,300/ounce in the early part of the week. The yellow metal made a low of $1,301.8/ounce on Tuesday. However, it managed to sustain above $1,300 and bounced back from there, recovering some of the loss, and closed at $1,314 per ounce, down 0.7 per cent for the week.

Silver, on the other hand, managed to outperform gold in the past week. Though it fell along with gold in the initial part of the week, it recovered all the loss and closed on a slightly positive note

The global spot silver prices plummeted close to 3 per cent intra-week to make a low of $16 per ounce on Tuesday. However, it managed to claw back and closed at $16.53, up 0.12 per cent for the week.

On the domestic front, both the gold and silver futures contract on the Multi Commodity Exchange moved in tandem with the global prices last week.

The MCX-Gold was down 0.3 per cent for the week. The contract closed at ₹31,114 per 10 g. The MCX-Silver futures contract closed at ₹39,094 per kg and was up 0.23 per cent for the week.

Dollar gains momentum

A strong rally in the US dollar index kept the bullion prices under pressure all through the week. The dollar index surged, breaking above the key resistance level of 92, and made a high of 92.9.

The index came off slightly from this high and closed the week at 92.56, up 1.12 per cent for the week.

The US Federal Reserve left the interest rates unchanged, as expected last week. The Fed statement also did not give any hint that the central bank would change its stance on interest rate hike.

As such, it leaves the projection unchanged for two more rate hikes from the Fed for the rest of the year. The outcome of the Fed meeting last week did not impact the dollar index much as there were no new surprises.

The US jobs data released on Friday were mixed. The unemployment rate fell to an 18-year low of 3.9 per cent. However, the non-farm payroll rose by 164,000 as against the market expectation of an increase of 192,000. Also, the increase in the average weekly earnings of employees remained stable at 2.6 per cent for the third consecutive month.

The data releases from the US in the past week did not influence the dollar movement much. The near-term outlook for the dollar index remains positive. Strong support for the index is at 92. As long as the index remains above this support, the possibility is high of it breaking above 93 in the coming days. Such a break can take the dollar index higher to 93.3 and 93.5 in the short term. This may continue to keep gold prices subdued in the short term.

Gold outlook

The bounce from $1,301 in the global spot gold ($1,314 per ounce) prices in the past week is technically significant. This leaves the broader $1,300-$1,370 sideways range intact. The yellow metal has been stuck inside this range since the beginning of this year.

Immediate support is at $1,310; while gold remains above this support, the near-term outlook is positive. A rise to $1,320 looks likely. A strong break above $1,320 will ease the downside pressure. Such a break can further take it higher to $1,325, $1,330, or even more over the short term.

The yellow metal will come under pressure only if it breaks below $1,300 decisively. In such a scenario, gold can fall to $1,285 or $1,280.

On the domestic front, the support in the ₹31,000-₹30,800 region has held well for the MCX-Gold (₹31,114 per 10 g) futures contract. Immediate resistance is at ₹31,175. A break above that can take the contract higher to ₹31,385. A strong break and a decisive weekly close above ₹31,385 will then pave the way for the medium-term targets of ₹32,000 and ₹32,500. The outlook will turn negative only if the contract breaks below ₹30,800. The next targets are ₹30,500 and ₹30,200.

Medium-term traders who took long positions on dips last week at ₹31,150 and at ₹31,050 can hold it. Retain the stop-loss at ₹30,600 for the target of ₹32,000. Revise the stop-loss higher to ₹31,250 as soon as the contract moves up to ₹31,430.

Silver outlook

The global spot silver ($16.53 per ounce) has reversed higher from around a crucial support level of $16.10. The near-term view remains positive. Silver can move further higher to test $16.90 in the coming days. A strong break above $16.9 will then increase the likelihood of the prices rallying to $17.2 or even higher.

The outlook for the MCX-Silver (₹39,094 per kg) futures contract is also positive. The contract has reversed sharply higher from a key long-term support level of ₹38,000. Support is in the ₹38,800-₹38,700 zone. As long as the contract remains above this support zone, a rally to revisit ₹40,000 levels is likely.

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