Bullion Cues: Bulls gaining momentum

Akhil Nallamuthu |BL Research Bureau | Updated on: Jan 22, 2022

While gold is yet to break out, silver cracks a key resistance

Bullion prices were up last week ahead of the US Federal Reserve’s meeting this Wednesday. Gold, despite gaining last week, is struggling to find direction whereas silver, which posted the biggest weekly gain in one year, looks more positive. Silver, which also has wide ranging industrial application, rose along with other metals. The rally in metals was triggered by low inventory and supply chain issues. On the other hand, of late, gold seems to be stuck between hawkish Fed and the rise in the US yields and the dollar. Thus, gold traders and investors seem to be taking a more cautious approach.

Nevertheless, the global gold ETFs (Exchange Traded Funds) has seen net inflow of 4.4 tonnes in the first half of this month according to WGC (World Gold Council) data. North American and European region saw net inflows in the first couple of weeks whereas Asia saw net outflows in the corresponding period. On the other hand, speculators seem to be waiting for more information as they trimmed their net long positions on the COMEX to 670.5 tonnes on 18th January compared to 707 tonnes a couple of weeks back.

On the trading front, powered by the mid-week rally, gold posted a gain of 0.9 per cent last week as the spot price in the international market closed at $1,833.3 per ounce. Similarly, on the Multi Commodity Exchange (MCX) gold futures (April expiry) appreciated by 0.8 per cent as it ended the week at ₹48,284 (per 10 grams). On the other hand, silver spot price in the global market rallied through the week and wrapped up the week with a gain of 5.6 per cent by closing at $24.23 per ounce on Friday. This is the biggest weekly gain in the last one year in dollar terms. Silver futures (March series) on the MCX went up by 5.2 per cent and closed at ₹64,806 (per kg).

MCX-Gold (₹48,284)

The April futures of gold on the MCX rallied last week and gained 0.8 per cent and closed at ₹48,284. Although it made an intraweek high of ₹48,625, the contract was unable to close above the resistance at ₹48,550. Therefore, the sideways range of ₹47,400 – ₹48,550 still holds true and unless the contract moves out of this range decisively, we cannot assume the direction of the next leg of trend.

Certainly, there are positive signs i.e., indicators like the relative strength index (RSI) and the moving average convergence divergence (MACD) are now showing a fresh uptick on the daily chart. In addition, there is an increase in the number of outstanding open interest (OI). The total OI of all active gold futures on the MCX has increased to 13,613 contracts on Friday compared to 13,192 contracts a week back. A rally accompanied by an increasing OI is a bullish sign.

However, the fact remains that the resistance at ₹48,550 is yet to be breached. So, despite some bullish signals, traders are advised to wait for the decisive breach of ₹48,550 before pulling the trigger. That is, go long on the break of ₹48,550 with stop-loss at ₹47,750. Since ₹50,000 is a psychological level, consider liquidating longs at this level. Further trades can be decided based on how the contract reacts to this level. Barrier above ₹50,000 is at ₹52,500.

If the contract declines from the current level, it can find support at ₹48,000 and ₹47,400. A breach of ₹47,400 can turn the near-term outlook negative. Support below ₹47,400 can be seen at ₹46,800 and ₹45,920.

MCX-Silver (₹64,806)

Silver futures (March) on the MCX surged ahead of the critical resistance at ₹62,500 last week and posted a gain of 5.2 per cent, its biggest weekly gain since May last year. The contract has eased past both the 21- and 50-day moving averages (DMAs). Substantiating the bullish bias, the RSI and the MACD on the daily chart are showing strong uptick in upward momentum. Likewise, the average directional index (ADX) is indicating that bulls are now stronger than bears. That leaves the probability of the contract making further gains.

However, it is worth noting that the cumulative outstanding OIs of all active silver futures on the MCX has seen a considerable drop – it stood at 7,787 contracts when compared to 13,518 contracts a week back. This is a sign that the shorts that dragged down the contract since November last year might be making an exit i.e., short covering.

Nevertheless, given the current momentum, the contract is likely to rally past the nearest minor hurdle at ₹65,000. Above this level, the price area of ₹67,375 (200-DMA) – ₹68,300 can act as a resistance band.

Since the chart is indicating more on the upside, traders can consider fresh longs. But rather than going in all at current price, split your entries. Buy 50 per cent of the intended quantity at current level and the remaining when price dips to ₹63,400 so that the average buy price will be around ₹64,100. Place stop-loss at ₹62,300. When the contract moves above ₹66,400 alter the stop-loss to ₹64,400. Exit the longs at ₹68,000 since there is a good chance for the contract to see a decline after hitting this level.

Trade smart
If the MCX gold contract declines from the current level, it can find support at ₹48,000 and ₹47,400
Published on January 22, 2022
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