Santa Claus rally gains momentum in gold

Global growth concerns, sell-off in equities and weak dollar support the upmove

Gold is gaining sheen. The global spot gold prices surged to a six-month high of $1,266.5 per ounce last week. Though the prices later came off from the highs, gold managed to close on a strong note for the week. The yellow metal closed at $1,257 per ounce, up 1.5 per cent.

Weakness in the US dollar, sharp sell-off in the global equity markets, increasing concerns about a slowdown in global growth and the political uncertainty that has led to a shut down in the US over the weekend helped gold gain sheen as a safe haven.

Silver, on the other hand, was broadly range-bound last week. The global spot silver prices oscillated between $14.55 and $14.85 per ounce. The prices closed at $14.65 per ounce, up marginally by 0.5 per cent.

Rupee caps gains

On the domestic front, the rupee is continuing to play spoil sport for gold and silver futures contracts traded on the Multi Commodity Exchange (MCX). The rupee appreciated over 2 per cent against the US dollar last week. This dragged the MCX-Gold and MCX-Silver futures contracts sharply down in the past week. The MCX-Gold was down 1.1 per cent and closed at ₹31,193 per 10 gm. The MCX-Silver futures contract was beaten down more than gold. The contract closed at ₹37,256 per kg and was down sharply by 2.1 per cent for the week.

After trading subdued in the initial part of the week, the US dollar index fell sharply after the US Federal Reserve meeting. The Fed increased the interest rates, as expected, by 25 basis points and indicated two more rate hikes next year. Earlier, the Fed had projected three increases in 2019 and the market was expecting it to revise it down to just one hike. The US dollar index fell sharply to a low of 96.17 and then bounced back to close the week at 96.96.

The outlook for the dollar index remains mixed. The index is retaining its 96-97.7 sideways range. A breakout on either side of 96 or 97.7 will determine the direction of the next move. A strong break below 96 will drag the index lower to 95 and 94.85. Such a fall in the index can take gold prices further high.

On the other hand, if the dollar index breaks above 97.7, it can initially test 98. A further break above 98 will then increase the likelihood of the index targeting 99 and higher levels thereafter.

As the market enters the truncated final week of the year, the dollar index may trade muted, and is also likely to retain its sideways movement.

Gold outlook

The global spot gold ($1,257 per ounce) has significant supports near current levels at $1,253 — the 200-day moving average — and at $1,250. Though a test of $1,250 is likely in the near-term, a fall below $1,250 looks less probable. Also, the downside could be limited to $1,240 and $1,235 even if gold declines below $1,250 in the coming days.

As long as gold trades above $1,250, an upmove to $1,268 and $1,270 is likely in the near term. A strong break above $1,270 will then increase the likelihood of gold targeting $1,280 and $1,285 levels thereafter.

On the domestic front, the outlook for the MCX-Gold (₹31,193 per 10 gm) futures contract is negative. The key resistance is in the ₹31,500-31,650 region.

As long as the contract remains below ₹31,650, a fall to ₹30,750 or even ₹30,500 is likely in the coming days. The outlook will turn positive only if the contract manages to decisively cross above ₹31,650. Such a break can take the contract higher to ₹32,200.

Silver outlook

The global spot silver ($14.65 per ounce) has been stuck between $14.40 and $14.85 over the past couple of weeks. A breakout on either side of $14.4 or $14.85 will determine the direction of the next move.

A break below $14.4 can drag it to $14 and $13.9. On the other hand, if silver manages to decisively breach $14.85, it can move up to test the crucial medium-term resistance level of $15.

The MCX-Silver (₹37,256 per kg) has an immediate support at ₹37,000. But the price action on the chart leaves the contract vulnerable to a decline below this support. A break below ₹37,000 can drag the MCX-Silver futures contract lower to ₹36,500 or even ₹36,000 in the coming days.

The contract will get a breather if it breaks above the near-term resistance level of ₹37,600. Such a break will ease the downside pressure and take the contract higher to ₹38,400 and ₹38,600 in the short term.

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