Gold tumbles below $1,200

The US dollar takes the sheen off the yellow metal

Gold crashed below the psychological $1,200 mark last week. The global spot gold price tumbled over 4 per cent intra-week and made a low of $1,160 per ounce.

However, the prices managed to reverse higher from the lows, recovering some of the loss, and closed at $1,184 per ounce, down 2.2 per cent for the week. The US dollar retaining its strength as a safe haven has taken the sheen off gold.

Dollar dominates

Strong US dollar continues to keep the gold prices under pressure. The US dollar index extended its rally and touched a high of 96.98. This dragged gold sharply below $1,200 last week.

The dollar index, however, came off from the week’s high of 96.98 and is currently poised at 96.10.

This helped gold recoup some of the loss towards the end of the week.

The dollar index can dip to 95.8, and a break below this level can drag it to 95 in the near term. Such a fall in the dollar index may give further relief to gold.

Key resistances for the dollar index are at 96.9 and 97.3. A strong break above 97.3 will boost the momentum and pave way for the next target of 98. In such a scenario, gold prices can fall further.

The negative correlation between the US dollar and gold has been strengthening since the beginning of this year. The dollar index has surged about 8 per cent from around 89 in end January to the current levels of 96.

Gold, on the other hand, has tumbled over 12 per cent from around $1,350 per ounce to the current levels of $1,184 over the same period. So a strong fall in the dollar index is needed for gold to reverse its trend.

But with risk aversion ruling high in the market, the possibility of the dollar index falling sharply in the near future is quite low.

Weak demand

Apart from a strong dollar, weak demand is another factor that is keeping gold prices subdued.

A recent report from the World Gold Council (WGC) shows that the global gold jewellery demand fell 2 per cent to 510.3 tonnes in the second quarter of this year.

Though the gold price has fallen sharply, demand from major consumers such as India has failed to pick up due to the weakness in their respective currencies, according to WGC.

The report also shows that the inflow of 63 tonnes into the global gold-backed Exchange Traded Funds (ETFs) in the first half of this year has been the lowest since the first half of 2015.

Gold outlook

The global spot gold ($1,284 per ounce) has crucial supports in the $1,160-1,150 region. This support zone held well in the past week and the prices have reversed higher from the low of $1,160.

As long as gold remains above this support, a range-bound move between $1,150 and $1,200 is possible for some time.

A strong break above $1,200 is needed to ease the downside pressure. Such a break can trigger a relief rally to $1,220 or $1,240 on the back of short-covering.

On the other hand, gold will come under further pressure if it decisively declines below $1,150. The next target if $1,110.

On the domestic front, the gold futures contract on the Multi Commodity Exchange (MCX) has declined below the key support level of ₹29,500 per 10 g. The contract fell 1.5 per cent in the past week and closed at ₹29,349. The near-term outlook is negative. The contract can extend its fall to test the next support level of ₹29,000. The level of ₹29,000 is a key long-term trend-line support which may halt the current down-move. A strong bounce from this support will increase the probability of the contract revisiting ₹30,000 or even higher levels over the medium term.

Silver stumbles

After trading in a narrow range between $15.2 and $15.7 per ounce for three weeks, silver declined sharply, breaking the range below $15.2 last week.

The global spot silver prices plummeted over 6 per cent intra-week and made a low of $14.34 per ounce.

The prices, however, recovered towards the end of the week, and closed 3.3 per cent lower at $14.80 per ounce. The level of $15.10 is a crucial resistance now. As long as silver remains below $15.1, there is a strong likelihood of the prices falling further to $14 in the coming days.

The MCX-Silver futures contract also moved in tandem with the global prices last week. The contract was down 3 per cent for the week and closed at ₹36,778 per kg.

The outlook remains negative. The contract can extend its down-move and test the next key support level of $36,000. A bounce from this support can trigger a corrective rally to ₹37,500 or even higher levels.

But a break below ₹36,000 will increase the likelihood of the down-move extending to ₹35,500.

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