This year will go down in history as the year in which gold prices crashed 23 per cent in just three months. Much has already been written about the causes — investment funds exiting from gold investments following the long-drawn sideways movement in gold prices over the last two years.
Demand from jewellery buyers made international gold prices halt around $1,320 for a couple of months. But another bout of selling has sent the yellow metal lower to $1,179 in June. So how much further will this decline go and where can investors get respite?
Long-Term view
The movement of gold prices between $1,500 and $2,000 since August 2011 appears to be a long-drawn distribution phase that ended when the $1,500 level was breached emphatically in May this year. In our previous review of gold, we had held that we will have a positive long-term view only as long as it traded above the $1,500-mark.
We now believe that a long-term correction has begun. This can be a deep and short-lived one or a long-drawn shallow correction. The coming months should indicate how the corrective phase is going to evolve.
The structural up-move in gold began at the 2001 low at $256. If we take plain Fibonacci retracement targets of this move, we get the next support band between $1,090 and $1,164. The metal is halting around this area. Sharp move below $1,090 will give the next long-term support at $890.
If we project the third wave down from the $1,923 peak, we get the targets of $1,398 and then $1,150. Convergence of targets around $1,150 makes it a likely halt, at least in the medium term.
The long-term view will turn positive only on strong close above $1,550.
Medium term view
So how is the movement of gold over the next few months going to be? Gold has critical support around $1,150. Prices hit the low of $1,179 in the last week of June and are trying to hold above this level now.
Immediate resistances are at $1,300 and $1,374. Inability to move beyond these levels will mean that prices will decline once again towards the $1,150 level.
Move above $1,374 will take the metal towards the critical resistance at $1,500. This level will be hard to overcome for a while.
MCX futures
The price of gold in India is linked to international prices. So the trend broadly follows the price in international market. But the movement of the Indian rupee influences the prices too causing a difference in domestic and international price movement.
Gold near-term contracts of 10 gram traded on MCX is currently hovering below Rs 27,000. Key long term support for this contract is around Rs 22,000. There is interim support around Rs 25,000, where it recently formed a low.
Medium-term resistances for domestic prices are at Rs 27,786 and then Rs 29,600. Reversal from these levels will mean that the pressure will continue on gold prices in the medium-term. Long-term resistance is around Rs 32,000.