Gold Goes Oversold; When Is The Rebound Coming?

by: Nikhil Gupta


 
- Gold kisses oversold boundary.

- Crucial support has been breached.

- India may lower import tax on gold.

 
Exactly a month ago, I penned an article titled Will India Ban Gold Imports? in which I suggested that India's demonetization drive was likely to push down the price of gold (NYSEARCA:GLD) and some stability could be expected around $1,140. At that time, gold was trading at $1,213.50; today, it is at $1,130. Will it rebound from here on?
 
A look at the gold (NYSEARCA:GDX) weekly price chart reveals that the commodity has breached an important support level, which earlier helped it climb north of $1,300. Although the support was breached last week, gold is doing well to stay close to the trend line. Generally, when a support is breached, the price declines further as bears intensify the selling pressure. However, this time, I am not so sure that the price would decline swiftly. Reason: Gold is kissing the oversold territory.
 
Source: TradingView
 
 
The 14-week MFI and the 14-week RSI readings tell us that the correction may have been overdone. While the 14-week MFI is at 24.7011, the 14-week RSI is at 30.1574 - both of them closer to their three-year lows. It is clear that whenever these readings have neared their respective oversold boundaries, a quick rebound was witnessed in gold's price. Therefore, it is not recommended to short gold now.
 
But, this is just the technical story. From a fundamental standpoint, India may provide some relief in the coming weeks. India, the world's second-biggest consumer of the yellow metal, is contemplating reducing the import tax on the shiny metal to 6 percent from the current 10 percent. India's Finance Minister Arun Jaitley may make the announcement when the nation's Union Budget is presented in February.

Under the leadership of PM Narendra Modi, the government has embarked on a mission to dismantle the network of black money flowing into gold, real estate and other asset classes. This has severely dented the demand for the precious metal even in the wedding season, which has historically seen a jump in jewelry purchases.
 
Source: IBTimes
 
 
A reduction in the import tax would serve two purposes for the Indian government and gold:
  • The blow dealt by a stronger U.S. dollar will be softened (since gold is a dollar-denominated commodity), and buyers may enter the scene once again to lift the price. This will also stabilize the businesses of numerous gold jewelers who have seen sales falling up to 40 percent.
  • The Indian government is attempting to stem the smuggling of gold. Praveen Shankar Pandya, chairman of Gem & Jewellery Export Promotion Council told Livemint, "Smuggled gold is cheaper while those who import have to pay high costs." Cutting down on import tax is expected to discourage the smuggling of gold and bring transparency into the system.
There are growing expectations that the upcoming budget will be a populist one as the government will be looking to win back the voters after the terribly executed demonetization drive. Therefore, offering sops such as raising the income tax slabs and reducing the import tax on gold cannot be ruled out.
 
Conclusion
 
Gold has breached an important support level, however, the oversold conditions may cause a pullback in the coming sessions. The 14-week MFI and the 14-week RSI readings are near three-year lows, and therefore, fresh shorting is not recommended. I will wait for another week of data to determine if the breakdown is sustainable or not.

India, the world's second-biggest consumer, has dented the demand for gold with its demonetization drive. But, it may provide some relief in the coming weeks as the government is reportedly planning to lower the import tax on precious metal. The announcement will likely be made in the upcoming Union budget in February. Lowering the import tax would make the precious metal cheaper, and would reinvigorate consumer buying and bring the much-wanted transparency into the system.

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