Weak outlook for Gold, Rupee is the key.

The bear market in gold is getting ferocious with the yellow metal moving steadily lower with every passing week. At $1,241/ounce, gold was down 3.6 per cent in the spot market last week. The minutes of the Federal Open Market Committee meeting that came during the week hinted that a consistent improvement in economic data would warrant trimming of the stimulus measures.

Also, the number of new claims for jobless benefits in the US fell sharply to 323,000 in the week-ended November 16, down 21,000 that was far steeper than expected, signalling a strong recovery in the labour market.

Holdings in the SPDR Gold trust — the world’s largest gold-backed exchange traded fund, continued to drop. Last week investors of the fund sold nine tonnes of gold and the fund’s holding was reported at 856.7 tonnes. The fund had a holding of 1,350 tonnes of gold in January this year.

In the domestic market, gold imports haven’t kicked off. The metal continues to sell at a premium to international gold. Demand for gold ETFs continues to be lacklustre. Daily volumes in goldBeES — the largest domestic gold ETF — in the week ending November 22 was 20,000 units, down 40 per cent over the average in the previous two weeks.

MCX gold dropped 1.6 per cent last week and closed at Rs 29,848/10 gram. MCX silver too closed with losses at Rs 44,547/100 gram, down five per cent. Daily volumes in MCX gold contracts averaged at 78,000 contracts in the week, improving from the previous fortnight average of 60,000 contracts.

DATA WATCH

Over the next two weeks, the new home sales data, jobless claims and producer price index are to be released in the US. On December 5, the second estimate of the GDP growth (for September quarter) based on more complete data will be released. Each of these is crucial to know how soon the Fed will start tapering its stimulus measures. If the Federal Reserve begins to scale back stimulus, interest rates would rise in the US. This would make gold less attractive compared with the US dollar. Domestic market gold traders would have to keep an eye on rupee movements. Gold has been holding up at Rs 29,000 to 30,000/10 gram only because of the weak rupee. If the rupee changes direction, gains on the metal will start to evaporate.

The rupee has been losing on two counts — one, the outflows from the equities market and two, the strengthening of the greenback on indications of tapering by the Federal Reserve. The dollar index has moved from a low of 78.99 in October to 80.7 now.

Gold-silver ratio is inching up — from 58 a few weeks back, it is at 62.4 now. Normally, the gold-silver ratio and gold/silver prices move in opposite directions. With the ratio now heading towards 70-72, it looks like there is more pain for gold and silver going ahead. In the last fortnight, gold behaved in a manner that we had forecast and cut the support at $1,283 and $1,250. In the coming two weeks, it may drop further to hit the June low of $1,187.90. The first support, however, could be at $1,220.

MCX gold has been moving sideways between Rs 29,000 and Rs 30,000/10 gram. If the rupee weakens against the dollar in the coming weeks, the contract may rise to touch Rs 30,900 and Rs 31,160. On the downside, supports are at Rs 29,400 and Rs 28,270.

MCX silver hit support at Rs 46,953 as we had forecast and is heading further down. In the coming weeks, it can test Rs 43,500 and Rs 41,400.