Gold searches for a floor

Washington (Nov 2)  Prices nose-dived last week. But the decline should halt soon, given the fundamental factors supporting the yellow metal

Reacting to the Federal Reserve winding down its stimulus programme and the US’ strong third quarter GDP data, gold prices slumped to a low of $1,161 and closed at $1,172.9/ounce last week, down 4.7 per cent. Silver too dropped sharply. It closed at $16.15/ounce, down 6 per cent.

The US Fed Reserve announced the end of its monthly bond buying programme in its mid-week meeting saying that the economy does not need the QE support and was progressing well. However, interest rates would continue to be low for a considerable time, it added, to let the recovery gather pace.

The third quarter GDP numbers that were released on Thursday were testimony to observations made by the FOMC. The GDP expanded at 3.5 per cent in the July-September period.

Coming after a 4.6 per cent growth in the June quarter, this was seen as a signal of sustained economic recovery.

The market now believes that the Fed will hike rates by 2015.

If this happens, gold’s appeal will dim and interest bearing debt securities will become more attractive.

The SPDR Gold Trust continued to see outflows. The fund reported holdings at 741.20 tonnes on Friday, down 4.19 tonnes from the previous week.

What next for gold?

The Fed might have finished its QE but Japan has just begun its and the ECB is mulling one. The Bank of Japan had last week announced additional QE measures after data showed that inflation plummeted to 1 per cent in October (vs. 1.1 per cent in September), the lowest in 12 months. The total Japanese stimulus of about $720 billion is expected to lift inflation. Now, market players say that the ECB will follow with QE to support its dropping economy and lift the stocks.

Monetary easing in any form is positive for gold as it is done with the objective of shoring up growth and driving inflation. However, what might turn a dampener is the strength of the dollar. If yen weakens and the euro too fizzles out on QE programmes, the dollar may continue to strengthen. A stronger dollar is detrimental to gold.

But investors should note that the US is not very comfortable with dollar further strengthening as it will hurt its exporters. So, the Fed might not raise interest rates immediately to prevent dollar from strengthening further. Last week, the US Dollar index rallied sharply to hit a high of 87.13 and closed at 86.9, from the previous week’s close of 85.7.

The US dollar has negative correlation with gold. But the numbers of the last 30 years show that there have been many instances where gold has moved lock-step with the dollar on an uphill journey. Also, now that gold prices have fallen so much that many mines across the globe are shutting operations, soon there would be less supply in the market of the metal and prices will edge up. Long-term investors should actually buy gold now.

Cues to watch

With Bank of Japan’s QE announcement coming late last week, there might be more pressure on gold this week.

However, watch out for the jobless claims data on Thursday and the employment situation data on Friday for cues. Keep an eye on the dollar index, any further rally to cut last week’s high of 87.13 may see the index crawl up higher towards 88.

What about Indian investors?

Last week, gold prices in India too corrected sharply despite a weak rupee. Spot gold prices dropped to ₹25,871/10 gram, down 5 per cent. Gold futures on MCX closed at ₹26,135, down 3.8 per cent. The contract hit a low of ₹25,881 on Friday. GoldBeES, the country’s largest exchange traded gold ETF, however didn’t see very significant correction in the week. It closed at ₹2,428, down 3.8 per cent for the week.

Long-term investors can buy gold now (read the ‘Our Call’ article on page 1). Short-term traders should be cautious on their long positions. The outlook on the rupee is stable to negative. If the rupee remains stable, then gold prices will follow the international trend and be weak. However, if rupee weakens against the greenback, to that extent, traders will see lower losses on their long positions. Last week, despite a strong rally in the US dollar index, the rupee dropped only marginally against the dollar. It closed at 61.36 from 61.28 against the US dollar in the previous week.

What charts say

From the charts it appears that gold prices may continue to be weak. There could be more pain left this week. If the price falls below $1,161, it can move further down to $1,100 levels.

MCX gold may largely remain range-bound, moving between ₹26,000 and ₹27,000. The first resistance is at ₹26,200 and the next at ₹26,500 to target ₹27,000. The support for the contract is at ₹25,800.

MCX Silver had last week lost 6 per cent and closed at ₹35,797. This week, it may test the support again at ₹35,100 and target ₹35,000. On the upper side, the first resistance will be encountered at ₹36,000 to target ₹36,500.

Source:  TheHinduBusinessLine