Derivatives

Bullion cues: No definite trend yet for precious metals

Akhil Nallamuthu | | Updated on: Jan 15, 2022
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Though gold and silver futures rallied, both are facing hurdles ahead

The World Gold Council (WGC) released its gold outlook for 2022 last week. Broadly speaking, the report expects the yellow metal to face headwinds because of higher nominal interest rate and a strong dollar. On the other hand, it expects the negative effects from the said two factors to be offset by supporting factors like high and persistent inflation, market volatility due to Covid and potentially robust demand from central banks and jewellery.

Inflation is likely to be driven by factors such as supply chain disruption, tight labour market and higher commodity prices. On the other hand, higher volatility in the market could drive investors to add safety through gold to bring down the risk.

That said, the Commitment of Traders (COT) report by the Commodity Futures Trading Commission (CFTC) shows that the net long positions stood at 706.7 tonnes as on last Tuesday. There has not been much change in net longs over the past three weeks as the price has been largely stable.

Nevertheless, both gold and silver prices appreciated last week. In dollar terms, gold and silver gained by 1.2 and 2.9 per cent as they wrapped up the week at $1,817.2 and $22.95 per ounce, respectively. On the Multi Commodity Exchange (MCX), gold futures (February expiry) went up by 0.7 per cent as it closed at ₹47,778 (per 10 grams). Silver futures (March series) gained 1.6 per cent by closing at ₹61,603 (per kg).

MCX-Gold (₹47,778)

The February futures of gold on the MCX rebounded after marking a low of ₹47,301 on Monday. The contract rallied and ended the week with a gain of 0.7 per cent. Nevertheless, it remains within the range of ₹47,400-48,550. As long as the contract lies within this price band, the next leg of trend will be uncertain.

Indicators like the relative strength index (RSI) and the moving average convergence divergence (MACD) on the daily chart are flat. The average directional index (ADX) shows that the bulls and the bears currently possess same strength and thus, the contract is unable to establish a trend in either direction.

A month back, we recommended long positions at around ₹48,600. While the initial stop-loss we advised was at ₹47,600, we advised to modify it a couple of weeks back as the contract was not able to extend the rally, which also gave bears a chance to drag it downwards. The revised stop-loss is at ₹47,250. Traders who hold this position can retain it with the same stop-loss for the week ahead. This position can be exited if the contract breaks out of ₹48,550 and touches ₹50,000. No fresh positions are suggested at this juncture as there are no strong indications of trend building up on either direction.

In case the contract breaks out of ₹48,550, it can appreciate to the immediate resistance at ₹50,000 in the near-term. Subsequent resistance is at ₹52,500. But if the contract breaks below ₹47,400, the short-term view can turn bearish. In that case, the price could drop to ₹46,500 and even to ₹45,920.

MCX-Silver (₹61,603)

On the back of the strong base at ₹60,000, the silver futures (March expiry) contract rallied last week and posted a gain of 1.6 per cent. However, the bulls fell short of lifting the contract above the key hurdle at ₹62,500. After marking an intraweek high of ₹62,385, the contract moderated to close at ₹61,603. As it stands, the contract seems to be positioning itself to move in a sideways range between ₹60,000 and ₹62,500. A decisive breach on either of these levels, can determine the next leg of trend. The RSI and the MACD, like in gold futures, are moving flat hinting at a clear lack of direction.

In case the contract gathers enough momentum on the back of last week rally and breaks out of ₹62,500, the short-term trend will turn bullish. It can then potentially rally to ₹64,000 and then ₹65,000. These are minor resistances and so, an up-swing to ₹67,600 – the 200-day moving average (DMA) is a possibility.

On the other hand, if the contract slips below the base at ₹60,000, there is an immediate support at ₹57,800. Notably, a breach of ₹57,800 can turn the outlook bearish and can invite more sellers. Support below ₹57,800 can be seen at ₹55,850 – the 50 per cent Fibonacci retracement level of the prior major uptrend between March and August 2020. Since then, the contract has largely been in a sideways range.

So, given that the contract is likely to stay within ₹60,000 and ₹62,500 in the near-term, traders are advised to stay out of silver futures. Probably, one can initiate fresh trades along the direction of the break of this range.

Published on January 15, 2022

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