Commodity Analysis

Stronger dollar dents gold

Rajalakshmi Nirmal | Updated on January 17, 2018 Published on July 24, 2016

The dollar was buttressed by strong US data and hopes of Fed rate hike before year end



Gold prices ended at $1,322.7/ounce, down by over 1 per cent last week.

Silver and platinum too ended in the red, with the former recording a drop of close to 3 per cent and the latter down by 0.9 per cent.

The drop in price of precious metals could be attributed to the rally in US dollar. The US dollar index moved to 97.46, up from the previous week’s 96.58.

The dollar rally was buttressed by a set of strong data and renewed expectations of a rate hike from the Federal Reserve before the end of the year. Also, with surveys indicating a slowdown in the UK due to Brexit, the dollar gained further strength at the cost of sterling.





The US manufacturing PMI hit a nine-month high in July. The flash manufacturing PMI rose to 52.9 in July showed data on Friday, up from the previous month’s reading of 51.3. Analysts had expected the index to rise to just 51.6.

The existing home sales data on Thursday showed that home sales increased over 1 per cent in June to 5.57 million units, the highest level since February 2007. June was also the fourth straight month of increase in sale of homes.

However, the confidence of investors in the yellow metal didn’t seem to have changed much.

SPDR Gold Trust, the largest gold backed exchange traded fund in the world, saw holding rise marginally to 963.14 tonnes, from 962.85 last week.

Asian consumers, however, showed some restraint. Gold prices in India ruled at a discount of $32.5/ounce to international prices, not much changed from levels last week.

In China, prices stayed flat, compared to a premium of $1/ounce previous Friday.

Cues to watch

This week, there are a lot of crucial data releases in the US and gold prices may be very volatile. It starts with new home sales and consumer confidence data on Tuesday, followed by the FOMC meeting announcement on Wednesday. The fed futures show an over 50 per cent chance of a Fed rate hike in March 2017.

However, markets will closely follow the statements of speakers to gauge their mood and see if there is any possibility of a rate hike in September. If there is an indication of an earlier than expected hike in rates, it will be negative for gold. On Friday is the first estimate of the second quarter US GDP, which is expected at around 2.6 per cent — a significant increase from the first quarter’s growth of 1.1 per cent supported by higher consumer spending and retail sales.

The medium term fundamental outlook for gold is still positive. As there is a lot of uncertainty that global markets may see from the US presidential election and Brexit, the yellow metal may retain its mojo.

If ECB comes with a fresh stimulus as President Mario Draghi indicated last week to support EU, that will be positive for gold.

Technical outlook

Technically, gold may try to consolidate for some time. Immediate supports are at $1,310/1,300. But if the metal manages to stay above this level, it may move up, targeting $1,345 levels.

A key resistance is at $1,337-38 levels. If there are some negative news developments and dollar strengthens further, and gold breaks the $1,300 support, it may move further down to $1,285 levels in the coming weeks.

MCX gold futures contract closed at ₹30,871 last week, down 0.3 per cent from the previous week.

MCX Silver futures closed 2 per cent down, tracking international prices at ₹46,312. Rupee was flat and closed at 67.08 against the US dollar and didn’t influence bullion prices.

This week, however, if dollar gains muscle and gold nudges down, the bullion futures contract in MCX may come under pressure.

The MCX gold futures contract looks weak on the charts. It may move down this week, breaking the support around ₹30,700 levels and target ₹30,000. Resistances are at ₹31,150 and 31,800.

The MCX Silver futures contract may see more pain this week.

Supports are at ₹45,600 and ₹45,000. If the metal cuts these levels, it may slip further to ₹44,000 levels.

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