Gold dives as Fed hikes rates

Gold has posted a negative close for the second consecutive week. The prices reversed sharply lower from the intra-week high of $1,281 per ounce to close the week at $1,254 per ounce, down 1 per cent for the week. The dollar gained strength after the Federal Reserve raised rates by 25 basis points as expected. This, in turn, dragged gold prices sharply lower.

Silver prices, on the other hand, were much more badly hit. Prices tumbled, breaking the psychological level of $17 per ounce and closed 3 per cent lower for the week at $16.7 per ounce.

On the domestic front, the gold futures contract on the Multi Commodity Exchange (MCX) failed to sustain above the psychological support level of ₹29,000 per 10 gm and fell to close 1 per cent lower for the week at ₹28,690 per 10 gm. The MCX-Silver contract also fell 3 per cent last week in tandem with the global spot price and closed at ₹38,481 per kg.

The dollar gained strength after the US Federal Reserve increased the policy rate, as expected, by 25 basis points. The Fed also announced its plan to begin trimming its balance sheet this year.

As this move was broadly expected by the market, the dollar index fell initially after the outcome of the Fed meeting. The index fell to a low of 96.3 on Wednesday but recovered sharply from there.

The weekly jobless claims showing fewer-than-expected number of Americans filing for unemployment benefits provided support for the dollar index to break above 97 and mark a high of 97.55 last week. The index has however, come off slightly from this high to close the week at 97.15.

Immediate support for the dollar index is in the 97-96.9 region, which may limit the downside in the near term. Though a dip to test this support zone cannot be ruled out, a break below 96.9 looks less probable. A subsequent reversal from this support may see the dollar index moving higher to 97.50 levels once again.

A further break above 97.5 can take it higher to 97.85 or 98. Such a rise in the dollar index may continue to keep gold prices under pressure. So, the possibility of gold prices falling further in the coming week is high.

If the dollar index fails to break above 98, a pull-back move to 97.5 or 97 is possible once again. In such a scenario, the index can remain range-bound between 96.45 and 98 for some more time. A breakout on either side of 96.45 or 98 will determine the next trend. Targets above 98 are 98.6 and 99.2. On the other hand, 96 and 95 are the levels that can be targeted if the dollar index declines below 96.45.

The global spot gold ($1,254 per ounce) has a cluster of support near current levels between $1,250 and $1,245 which can be tested in the initial part of the week. If gold manages to reverse higher from this $1,250-1,245 support zone, a relief rally to $1,260 or even $1,270 is possible.

But a fall below $1,245 can increase the downside pressure and drag prices lower to $1,235 or even $1,230 thereafter. The level of $1,230 is a key trendline support and further fall below this level is less likely.

MCX-Gold (₹28,690 per 10 gm) futures contract can dip to test the immediate support at ₹28,500. An upward reversal from this support can take it higher to ₹29,000 or ₹29,200. But if the contract declines below ₹28,500, it can fall to ₹28,000 in the coming week. The level of ₹28,000 is a strong support and a break below this level is less likely.

The global spot silver ($16.7 per ounce) has immediate support at $16.6. But this support is vulnerable and silver can break below it and decline to $16.3 this week. Inability to reverse higher from $16.3 can drag it further lower to $16. But if silver manages to bounce from $16.3, a rise to $16.75 or even $17 is possible thereafter.

MCX-Silver (₹38,481 per kg) futures contract has some support around ₹38,300, but it might not hold. A break below this intermediate support can drag the contract lower to ₹37,500 or even ₹37,150 in the coming days. Further fall below ₹37,150 looks less probable.

A subsequent reversal from ₹37,150 can take the contract higher to ₹38,500 levels. Key resistance for the contract is around ₹39,750. The downside pressure will ease only if the MCX-Silver contract breaks above this hurdle decisively.

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