Are gold prices due for a near term correction?
With concerns about a second wave of coronavirus infections and a spate of stimulus packages announced globally to aid economic recovery, activity in gold has spiked. Domestically, the price of gold has also been aided by the sliding rupee, which has settled at steeper levels to the USD.
The concern for both investors and those who seek to buy physical gold is whether this rally will sustain or experience a correction sometime soon…
By the end of June, the benchmark Comex contract for gold had climbed to $1,800 levels, the highest it has reached since the all-time peak of $1,911.60 in September 2011. Even spot gold stood at record levels, topped only by the September 2011 peak of $1,920.85.
MCX Gold to Silver Analysis
The Gold to Silver ratio represents the number of units of silver required to purchase one unit of gold. This comparison helps traders to decide when to purchase one metal over the other as a lower Gold-Silver ratio indicates that silver is outperforming and a higher ratio suggests gold is doing better.
After hitting a historical high of 1.17 levels on 18.03.2020, the MCX Gold/Silver ratio fell to approximately 0.92 in the first week of June 2020, towards the trend line and is currently taking strong support on a weekly basis. We expect the ratio, which is looking good, to face strong resistance at 1.03 levels. On breaking above those levels on daily basis, we expect it to head towards 1.12 to 1.17 levels over the next three to six-month period.
So effectively, we expect Gold to outperform Silver.
Gold Technical Outlook
Over the past three months, Comex Gold has been trading in the consolidation range of $1660 to $1800/ounce and technically, it looks good.
Going forward, it will face strong resistance at 1800 on a weekly basis and breaking above which, the price is all set to head towards $1925 to $2000 per ounce over the next six months to one-year period. On the downside, it will take strong support at 1660 levels on a weekly basis.
The RSI indicator does not support the short-term upside movement in Gold prices. It has formed a negative divergence pattern on a weekly basis and we expect a short-term reversal from here. However, the RSI indicator will face strong resistance at 68 levels, above which we can see a positive movement in gold prices.
On MCX, technically, gold prices have formed a negative divergence pattern on a daily/weekly basis and the price is facing strong resistance at Rs 49,000 levels. Going forward, we can expect a short-term reversal from here. It is, however, expect to take strong support at approximately Rs 47800 levels, on the trend line. Once it breaks below this price, it could drag down towards Rs 46,000 first and after that, 44,000 will act as a strong support level for the short term. However, the long-term trend is ‘Upwards’.
It would be prudent for investors to ‘Buy on Dips’ for the target price of 54k to 55k over the next one-year.
Is the USD/INR headed downwards in the medium term too?
Over the past three months, the Rupee has remained in the consolidated range of 74.70 to 76.90 levels. Fundamentally, it is driven by a mix of both Positive and Negative factors.
- Lower crude oil prices.
- Higher tax for petrol and diesel
- Higher FII equity inflows over the past two months
- Dollar index appreciating
- Lower Global GDP due to the outbreak of the corona Virus
- Lower Interest rate
Technically, the USD/INR pair has traded in a consolidation range between 74.90 to 76.40 levels over the past three months. It broke below the consolidation range support of 74.90 levels on July 02, 2020, only to take immediate support at 74.30, below which it will take immediate support at 73.60 levels first and then take strong support at 73 levels (200 Simple Moving average) over the next two to three months period.
Over all, the USD/INR pair is headed ‘downside’ in the short term. However, on a long-term basis it is headed upwards. We expect it to face strong resistance at 76.50 levels, breaking above which on a daily closing basis, the price can march towards 78.50 first, and to 80 levels thereafter, over the next six months to one-year period.
You may also like to read: 3 stocks greening the bull zone
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflicts of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.