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Gold's Relationship With the Indian Rupee


The recent weakness in the rupee against the dollar resulted in a rally.

According to Reuters, India hiked the import duty on gold yet again to a record 10% last week and raised excise duty on the metal, as imports jumped in July despite the government's attempts to strangle supply and curb demand to rein in dollar spending.

This decision resulted in a further rally, and gold prices in India rose to their four-month high on Friday. Today, the yellow metal extended gains and climbed up to over 86,000 rupees per ounce, which is gold's highest level since April 10.

At this point, it's worth it to mention that the rally in precious metals began only after the rupee plunged to an all-time low of 61.65 against the American currency. This raised fears that the dollar-denominated metal would become costlier, and that supply would be restricted after the Reserve Bank of India prohibited inward shipment of gold coins.

What impact have these circumstances had on gold's chart? Where are the nearest support zones and resistance levels? Let's take a closer look at the charts and find out what the current outlook for gold priced in rupees is.

Click to enlarge

On the above chart, we can see that the situation improved past week. Last Monday, the price climbed up and almost reached the July top.

In my previous essay, I wrote:
If the bulls fail, we should prepare for a bearish scenario. In this case, if the price of gold drops below the recent decline's low, we may see a bearish double top formation.

Last Tuesday, after a higher open, the yellow metal edged up and reached over 82,000 rupees per ounce. In this way, buyers prevented the bearish scenario. Although gold gave up the gains and dropped below the July top, gold bulls didn't give up and pushed the price higher.

Quoting my essay from last week:
[T]he next resistance is at the 84,298 rupees level, which is where April's low is. Slightly above this level is also the 127.2% Fibonacci extension level, which, together with the aforementioned bottom, forms a strong resistance zone.

As you can see on the daily chart, Friday's increases led gold's price to its four-month high and the aforementioned price target was reached. This positive event encouraged buyers, and today the shiny metal climbed up once again and reached its new local top at 86,147 rupees per ounce.

Will this improvement last longer? And what's next?

The nearest resistance level is the 150% Fibonacci extension level, based on the decline from the June top to the June low (around 86,817 rupees). Slightly above this (around 87,433 rupees) is also the 61.8% Fibonacci retracement level, based on the entire decline from the 2012 top to the 2013 low, which together with the March top forms a strong resistance zone.

If these high levels encourage gold bears to go short and trigger a correction, the nearest support level is at the 23.6 Fibonacci retracement level based on the entire June-August rally (currently around 82,585 rupees). Slightly below are the August 13 top and the July peak, which together form a support zone.

Now that we know the current technical situation, let's take a look at the INR/USD chart and find out whether the previously mentioned relationship actually exists or not.

Click to enlarge

As you can clearly see on the above chart, this relationship didn't last earlier in the year. After the May top, we saw a strong decline that took the rupee to the June low, slightly below the 165 level. At that time, we didn't see higher prices in gold priced in rupees. We also didn't notice this relationship in early July.

For the first time, gold responded to the INR/USD lower values at the end of July. In the following days, we saw similar situations, and I have marked them on the chart with orange rectangles.

Before I summarize, let's check where the nearest support could be.

As you can see on the above chart, the rupee is approaching the green support line, based on the March bottom and the June low. It is quite possible that this line will stop the decline.

When we factor in the Fibonacci price extensions, we know that the rupee dropped below the 150% extension level (close to 159 level). From this point of view, there is still much room for further declines because the 161.8% extension level (around 158.89) is much lower than where the price is today.

Summing up, the recent weakness in the rupee against the dollar resulted in a rally to a more-than-four-month high. If the Indian currency reaches the green support line based on the March bottom and the June low, it is possible that this line will stop the decline, which may slow further growth in gold. However, if it is broken, the rupee may drop further against the dollar. If it happens and the previously mentioned relationship remains in place, gold priced in rupees will likely reach its new local high.

Nadia Simmons is a private investor and trader, dealing in stocks, currencies, and commodities. Using her background in technical analysis, she spends countless hours identifying market trends, major support and resistance zones, breakouts and failures. You can read Nadia's analyses at Sunshine Profits' website, where she publishes her articles on gold and crude oil trading.

Twitter: @SunshineProfits
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