CO:MCX gold: Breach of Rs 26000 support could indicate long-term price weakness
By Deepak Rangan
MCX Gold prices have weakened in December, falling from around Rs 29500 to currently trade near Rs 28,000, a decline of over 5%. MCX gold even went on to make a new high in November when global gold prices were tethering on a thin line of support. With the dollar strengthening, gold prices will move lower internationally.
Fundamentally, gold remains bullish. Nothing in the macro-economic picture has changed. Europe is still reeling under its mountain of debt, china is slowing down and the US remains weak.
The main reason for the price crash last week is because of mass liquidation, not because of inherent weakness in gold- Hedge funds and investment banks liquidating gold positions in order to cover for their losses in other instruments combined with margin calls being hit.
In fact, the crash in gold prices is believed to have triggered massive buying interest in India, China, Dubai and Singapore
Technically, MCX gold is expected to find a strong support zone around the Rs 26000- Rs 26500 area (chart below). This has been an incredible support zone since August and if prices consolidate in the area, it could indicate the next leg of the expected bull rally.
However, a strong downside break could indicate that prices will head lower until it finds its next support. This might occur because of an ever-strengthening dollar which makes Gold expensive in Rupees. Strength in dollar will continue as long as investor confidence in Europe is shaken and money flows out of the Euro-Zone into the United States. Once the Eurozone collapse is done with, capital will start fleeing from the US.
Remember that the US is just the safest amongst the most dangerous assets. It is not an independently safe asset. The US debt to GDP is around 100% and with a slowing economy, the more debt is takes, the more difficult it will find to repay. At which time, there will be just 2 options left- default or print money. Default will push gold prices higher, but the most likely option the US might resort to is printing money. An action which will shoot gold prices through the roof.
