Safe haven demand adds sheen to gold

Brexit fears, weak dollar trigger a sharp rally in bullion prices over the past three weeks

Gold continues to remain on a strong footing. The “Brexit” fear in the market is helping the yellow metal regain its safe haven status. Bullion prices surged for the third consecutive week. The global spot gold price rose 1.9 per cent last week to close at $1,298.65 per ounce. Gold prices have skyrocketed 7 per cent over the last three weeks. Gold broke above the psychological $1,300 mark last week to make an intraweek high of $1,315.

But prices reversed lower on Thursday after the campaigning in the UK for the referendum was stopped following the murder of Labour MP, Jo Cox. However, gold bounced back once again from the low of $1,276 on Friday to close just below $1,300.

The US dollar retreated last week after the Federal Reserve left rates unchanged. The US Fed had raised concerns on the global growth slowdown as well as the uncertainty prevailing over the outcome of the UK referendum this week. It also hinted at the greater possibility of only one more rate hike this year. The US dollar weakening after the Fed meeting outcome helped gold to gain sheen.

On the domestic front, the gold futures contract traded on the Multi Commodity Exchange (MCX) rose to a high of ₹31,245 per 10 gm. However, the contract gave back half of its gains to close just 1.7 per cent higher for the week at ₹30,602.

Brexit to move the market

The referendum on Thursday to decide whether the UK should stay or leave the European Union (EU) will continue to influence the bullion price movement. There is a strong possibility of a panic selling in risky assets if the outcome of the voting is in favour of the UK leaving the EU. In such a scenario, one should not be surprised to see gold surging further to $1,350-$1,365 levels. However, the pace of the rally in gold price could be slow if the dollar also gains strength in this scenario. On the other hand, if the UK decides to stay in the EU, then it may trigger a pull-back move in gold prices on the back of profit taking.

On the charts

As far as the bigger picture goes, global spot gold prices have been broadly range-bound between $1,200 and $1,300 for more than three months now since March. A decisive breakout on either side of these levels will decide the next move over a medium-term time frame.

The ability of gold to sustain above $1,200 ever since it broke above this level in February is a big positive. This leaves the possibility of gold price breaking above $1,300.

The downside is expected to be limited to $1,200 even if a sharp sell-off is triggered after the UK referendum.

The 200-week moving average at $1,313 will be an important resistance to watch at the moment.

A strong break above it can take gold higher to $1,350 and $1,365 thereafter. In the short term, $1,250 is an important support. Inability to break above the 200-week moving average resistance at $1,313 and subsequent reversal from there can trigger a fall to test this support at $1,250 in the short term.

On the domestic front, the MCX-Gold futures contract is hovering around an important resistance at ₹30,600.

There is also another important resistance in the ₹31,000-31,100 zone, which can be tested if the contract moves up this week from current levels. A strong break above ₹31,100 will pave the way for a rally to ₹32,000 or even ₹32,500.

On the other hand, if the contract fails to move higher from current levels, there is the danger of a corrective fall to ₹30,000 or even ₹29,500. A strong break below the immediate support at ₹30,300 can trigger this fall.

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