Commodity Analysis

Gold stays afloat amid strong dollar

Gurumurthy K | Updated on August 12, 2018 Published on August 12, 2018

CFTC data indicates a possible upward reversal on the back of short-covering

The yellow metal managed to sustain above the psychological $1,200 mark in spite of the dollar strengthening sharply last week. It closed the week at $1,210 per ounce.

This movement has left the immediate outlook mixed for the yellow metal. The price action in the coming days will need a close watch, which may give a cue on the next move.

Dollar gains momentum

The US dollar index surged over a per cent on Friday after US President Donald Trump doubled the import tariffs on aluminium and steel for Turkey. This had triggered a sharp sell-off in the risky assets, and in turn, the US dollar surged, gaining safe-haven status on Friday. Though gold has not gained sheen from the on-going tariff war by the US, its ability to sustain above $1,200 last week amid a strong dollar is a positive.

This indicates that the yellow metal is lacking fresh sellers to drag it below $1,200. It also increases the possibility of gold gaining safe-haven status in the futures if the fear on the trade war front intensifies. However, as the US dollar remains strong, the pace of up-move could be slow in gold, even if it gains safe-haven status. The dollar index (96.35) has decisively breached a key resistance level of 95.60. The level of 95.6 will now act as a strong support for the index. Resistance is at 96.70. A break above it can take the index higher to 97.25 in the near term. A further break above 97.25 will then increase the likelihood of the dollar index targeting 98 over the short term. A strong dollar may continue to keep the gold prices subdued.

Reversal on the cards?

Data from the US Commodity Futures Trading Commission (CFTC) suggests that the current down-trend in gold could be nearing an end. The net positions (longs minus short positions) of non-commercial traders in the COMEX — gold futures — have declined to 12,688 as of August 7 from 1,48,837 a year ago. An analysis of this data from the past shows that the net positions have reversed higher every time it nears or declines below 10,000. This indicates that a further downside in gold could be limited and an upward reversal on the back of a short-covering is on the cards.

The global spot gold price ($1,210 per ounce) has crucial supports at $1,200 and then in the $1,190-1,185 region. If the metal breaks below $1,200, it can fall to test the $1,190-1,185 support zone. Whether gold breaks below $1,185 or not will decide the next move. The level of $1,185 is a strong long-term support which is likely to halt the current fall. A bounce from this support can take gold prices higher to $1,200 and $1,225. But, if gold breaks below $1,185, the prices can fall to $1,165 or even $1,150 thereafter.

On the other hand, if the global spot gold prices manage to sustain above $1,200, a bounce back to $1,235 or $1,240 is likely in the short term. In such a scenario, a range-bound move between $1,200 and $1,240 is possible for some time. The downside pressure will ease if gold manages to decisively surpass $1,240. The next targets are $1,250 and $1,260.

On the domestic front, the gold futures contract on the Multi Commodity Exchange (MCX) inched higher last week. The contract has closed at ₹29,783 per 10 g, up 1 per cent for the week. As long as the contract remains above ₹29,500, the short-term outlook will be positive. A rally to ₹30,000 and ₹30,180 is possible in the coming days. A strong break above ₹30,180 will then increase the likelihood of the contract rallying to ₹30,500 and ₹30,600 thereafter. The outlook for the contract will turn negative only if it declines below ₹29,400. Such a break can drag it to ₹29,000.

Dip likely in silver

Silver has been failing to breach decisively above $15.50 per ounce over the past three consecutive weeks. The global spot silver prices made a high of $15.51 and has reversed lower to close the week at $15.31 per ounce, down 0.7 per cent. The near-term view is negative. The prices can dip to test the crucial support level of $15 in the coming days. A bounce from this support can take the prices higher to $15.5 and $15.6 again. But a break below $15, though less probable, can drag silver lower to $14.4 or even $14 thereafter.

On the other hand, the outlook for the MCX-Silver futures contract is mixed. The contract has been hovering around $38,000 per kg for more than a week. Resistance is at ₹38,300 and support is at ₹37,750. A breakout on either side of ₹37,750 or ₹38,300 will decide the next move.

A strong break above ₹38,300 can take the contract higher to ₹38,650. On the other hand, a break below ₹37,750 can drag it to ₹37,500 or even ₹37,000.

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