Gold in for a short-term correction

But the sell-off in global equities can help limit downside and pace of fall

It was a volatile week for gold. Global spot gold prices began the week on a sombre note and fell to a low of $1,332 per ounce in the initial part of the week. Though prices recovered from this low, the bounce-back move was short-lived. The yellow metal failed to breach $1,350 and reversed sharply lower after making a high of $1,351.

Strong US jobs data release on Friday triggered this price reversal. Gold fell sharply from around $1,350 to a low of $1,327 after the data release and has closed at $1,333 per ounce, down 1.2 per cent for the week.

Silver, on the other hand, was beaten down much harder than gold. The global spot silver prices tumbled 4.6 per cent last week and closed at $16.59 per ounce.

On the domestic front, the weak rupee helped in limiting the loss in the gold futures contract on the Multi Commodity Exchange (MCX). The MCX-Gold futures contract surged to a high of ₹30,720 per 10 gm on Friday. However, it reversed lower after the US job data release, giving back all the gains made and closed the week on a flat note at ₹30,367 per 10 gm.

But unlike the gold contract, the MCX-Silver futures contract remained subdued all through the week and failed to remain insulated from the fall. The contract tumbled in tandem with global prices and closed the week 3.3 per cent lower at ₹38,651 per kg.

Job data boost

The US added 200,000 in its non-farm pay roll in January against the market expectation of an increase of 180,000 jobs. The average hourly earnings showing an increase for the third consecutive month came as an additional boost to the job numbers. The average hourly earnings increased 2.9 per cent (year-on-year) in January and raised the speculation in the market for four rate hikes in the US this year instead of three.

The dollar index has been consolidating between 88.50 and 89.50 over the last one week. The index can breach 89.5 and see a relief rally towards 90 and 90.5 in the near term. A break above 90.5 can take the index higher to 91. The relief rally in the dollar index can keep gold prices pressured and pull them lower in the short term. But a possible sell-off in the global major equity indices might keep the pace of fall in gold prices slow and limit the downside.

Gold outlook

The sharp reversal on Friday leaves the short-term bias bearish for gold ($1,333 per ounce). Also, there is a complex head and shoulder reversal pattern visible on the daily chart. This is a bearish pattern and the neckline resistance of this pattern is at $1,340. As long as gold remains below $1,340, it can break the immediate support at $1,325 and fall to $1,310 and $1,300 in the short term. However, a further fall below $1,300 looks unlikely at the moment. The level of $1,350 is a key resistance to watch. Gold will regain bullish momentum only on a strong rise past $1,350.

On the domestic front, MCX-gold (₹30,367 per 10 gm) has a key support at ₹30,000. The contract will come under pressure only if it breaks below this support. Such a break can take the contract lower to ₹29,800 initially.

A further break below ₹29,800 can drag it to ₹29,400. But if MCX-gold manages to sustain above ₹30,000, the outlook will remain bullish and the contract can move up to ₹31,000 in the coming days. Though the global gold price may remain subdued, a rally to ₹31,000 in MCX-gold is possible if the rupee weakens further.

Silver outlook

The strong fall in global spot silver ($16.5 per ounce) below $17 per ounce last week is a negative. Key resistances are at $16.75 and $17 which can cap the upside. While below $17, a fall to $16 and $15.6 is possible in the short term.

The MCX-Silver (₹38,651 per kg) hovers above a key support level of ₹38,500. If the contract remains above this support and bounces higher, a range-bound move between ₹38,500 and ₹40,000 can be seen in the short term. In such a scenario, the bias will remain positive for the contract to breach ₹40,000 and target ₹41,000 or even higher levels over the medium term. But if MCX-Silver breaks below ₹38,500, it can fall to ₹37,300 in the coming days.

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