Commodity Analysis

Strong dollar impedes gold

Rajalakshmi Nirmal | Updated on January 24, 2018 Published on January 25, 2015

The Fed meeting this week will determine the future trajectory in the yellow metal

Gold moved past $1,300 an ounce, but closed the week at $1,294, up only 1 per cent. The rally was thwarted by the strong dollar that surged due to the euro’s travails.

The US dollar index moved up to 94.76, from the previous week’s close of 92.5 as the euro fell to an 11-year low due to the European Central Bank’s massive QE announcement.

US SPDR Gold Trust continued to see inflows. The ETF’s holding rose by 10.76 tonnes to 741.65 tonnes.

Silver ended the week at $18.29/ounce, up 2.8 per cent. It hit a high of $18.48 on Wednesday.

Platinum, however, was only marginally up for the week and closed cheaper than gold. At $1268.75, the metal was up 0.12 per cent.

The data from the National Association of Realtors on Friday showed existing home sales in the US increased 2.4 per cent to 5.04 million units in December, after a fall in November. This dampened the bullishness in gold.

The European Central Bank has announced a $68-billion stimulus a month for the euro zone, making it tougher for the Fed to go ahead with its rate hike plans.

Cues to watch

The global economy is sagging and this will at one point impact the US too.

The IMF has cut its global growth outlook for 2015 by 0.3 percentage points to 3.5 per cent. It is not just the ECB, but the central banks of Japan, China, Switzerland and Canada too that are fighting recession. If in the coming weeks, data hint at a weak US recovery, the Fed may actually delay its plans of rate hike.

This becomes likely as a strong dollar will hurt US exports that contribute significantly to that nation’s economy. There are a lot of crucial data releases in the US this week. It starts with the release of durable goods order and new home sales data on Tuesday.

On Wednesday is the FOMC meeting announcement, which will show whether or not the Fed will stay its course in raising interest rates.

The weekly jobless claims data will be released on Thursday. On Friday will be the release of the fourth quarter GDP data and the full year growth estimate. Analysts expect growth at 3 per cent in the December quarter after a robust 5 per cent growth in the September quarter.

Indian gold investors should watch out for the rupee. The currency has been moving up despite the dollar’s strength.

The rupee moved to 61.4 against the dollar last week from the previous week’s close of 61.87. A stronger rupee is not good for domestic gold investors.

On the charts

Gold hit our target at $1,300/ounce last week. But, the subsequent strength in the dollar saw gold giving up some gains.

This week, the metal may largely try to consolidate around $1,300 levels, moving between $1,280 and $1,300. If there is some weakness in the dollar, gold may move up to cross $1,307 and hit $1,310.

MCX gold (₹27,864/10 gram) crossed its resistance at ₹28,000 last week, but it stayed only briefly above it.

This week, if the contract is successful in cutting past ₹28,000, it can move further to ₹28,800, if not, it will move down to a target of ₹27,500 and ₹27,000.

MCX Silver (₹39,965/kg) hit a high of ₹40,580 last week.

But then, as the rupee strengthened and international silver prices too weakened towards the end of the week, the contract lost its gains. In the coming days it may again try to make above ₹40,000 levels and target ₹41,300. However, if the rupee strengthens against the dollar, the contract may slide to ₹39,400 and ₹38,800.

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