Bullion came under pressure last week as the dollar strengthened and the US treasury yields rose. The dollar index, now at 109.6, appreciated by three-fourth of a per cent last week and the US 10-Yr yield increased to 3.195 per cent on Friday compared to 3.03 per cent a week ago.

Thus, both gold and silver prices fell. In the international spot market, gold and silver dropped by 1.4 and 4.3 per cent to close the week at $1,712.8 and $18.06 per ounce, respectively.

Similarly, in the domestic market, gold futures (October series) declined 1.7 per cent to end the week at ₹50,368 (per 10 gram). Silver futures (December expiry) slipped 4.9 per cent to close the week at ₹53,022 (per kg).

As prices remain weak, investors seem to be exiting from the yellow metal. According to the World Gold Council (WGC) data, the outflows in the global gold ETFs (Exchange Traded Funds) continues. For the week ended August 26, the net outflows stood at 6.2 tonnes, marking 10th week of consecutive outflows. So, there has to be some positive signs with respect to price to gain investors’ confidence.

That said, on the charts, the bias is bearish although gold is in a consolidation phase. But silver is clearly bearish.

MCX-Gold (₹50,368)

The October gold futures on the MCX dropped last week and it closed at ₹50,368 versus the preceding week’s close of ₹51,238. Even though the contract posted a loss of 1.7 per cent, it continues to trade within the range of ₹50,000-52,600. So, we cannot assume that the trend is bearish.

The participants too seem to be unsure of whether the contract will breach the support at ₹50,000. Because the cumulative outstanding Open Interest (OI) of all gold futures on the MCX has decreased slightly to 18,165 contracts compared to 18,937 contracts on August 12, when the gold futures began falling. So, as the price dropped, there was some liquidation. On the other hand, when we consider the last week alone, there was an increase in OI as it stood at 17,293 contracts on August 26, which indicates that there was some bearish build-up over the past week.

However, the support at ₹50,000 holds true and we would suggest waiting for the breakdown of the same before initiating short positions. Note that there is a chance for the contract to bounce off this level. In such a case, it can retest the range top of ₹52,600. But if ₹50,000 is breached, the trend will turn bearish, and we can expect a quick fall to ₹47,700 initially and then to ₹46,000.

But if the contract regains positive momentum and breaks out of ₹52,600 next week, which is less likely, gold futures could rally to ₹54,000 – the nearest resistance. Subsequent resistance is at ₹55,000.

Silver lining
Cumulative OI of silver futures shot up to 28,014 contracts on Friday compared to 15,923 contracts on August 12
MCX-Silver (₹53,022)

The December silver futures on the MCX saw a considerable fall last week, wherein it breached the support at ₹55,500. And then it fell to mark an intra-week low of ₹51,857 before recovering a bit and closing the week at ₹53,022. Thus, the support at ₹52,000 aided the contract in arresting the decline. This is a strong support and thus, we might see a rally, at least a minor one, from the current level.

Nevertheless, participants should be wary of strong short build-ups that have been happening over the past three weeks. That is, the cumulative OI of silver futures shot up to 28,014 contracts on Friday compared to 15,923 contracts on August 12. Also, the volume has been higher along with the fall. So, bears have positioned themselves very strongly at this juncture. Therefore, any rally from here should be taken with a pinch of salt and rather than going in for a counter-trend trade to catch the possible rally from here, one can wait and capitalise on the rally to initiate fresh short positions. On the upside, a move beyond ₹55,500 is less likely, at least in the near term.

If the contract extends the decline and falls below ₹52,000, it can test ₹50,000 – a psychological support. Subsequent support is at ₹48,000. On the other hand, if the contract manages to cross over ₹55,500, it will face barriers at ₹58,300 and ₹60,000.

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