Derivatives

Bulls tighten their grip on bullion

Akhil Nallamuthu BL Research Bureau | Updated on October 16, 2021

Gold and silver futures on the MCX remain above key levels

Energy crisis and inflation concerns resulted in metal prices rallying sharply and bullion, considered as a hedge against inflation, was also a beneficiary.

The latest US inflation data released by the US Bureau of Labour Statistics (BLS) last week, showed that the inflation remained at elevated levels of 5.4 per cent in the month of September (it was at 5.3 per cent in August).

This makes the case stronger for gold and silver prices to firm up and this trend can be expected to continue. Last week, gold and silver gained 0.6 per cent and 2.7 per cent as they ended at $1,767.3 and $23.28 per ounce, respectively. On the domestic front, gold futures appreciated by a marginal 0.4 per cent for the week and closed at ₹47,213 (per 10 grams), whereas silver futures posted a 2.4 per cent gain by wrapping up the week at ₹63,271 per kg.

The bullishness seems to have better reflected in silver because of its close association with other metals, which rallied strongly on the back of the power crisis.

Net long positions on the COMEX did not change over the last week and stood at 590 tonnes on Tuesday. It is to be noted that the net long positions had increased in the week earlier for the first time in about a month. This is expected to rise having a positive impact on the prices.

MCX-Gold (₹47,213)

A close above the 21-day moving average (DMA) and the falling trendline in the week before last week set the tone for the gold futures on the MCX last week. The December futures began the week positively and rallied to mark a two-month high of ₹48,100 on Thursday.

However, there was a considerable drop in price on the truncated Friday session which resulted in the contract giving up most of the gains it made, ending with just a 0.4 per cent rise.

Thus, the resistance band of ₹47,800 and ₹48,000 seems to have succeeded in preventing the bulls from taking the contract beyond these levels.

But positive signs continue to stay valid i.e., the relative strength index (RSI) and the moving average convergence divergence (MACD) stay in their respective positive territory.

The price continues to stay above both 21- and 50-DMAs. Going ahead, gold futures is likely to regain the upward momentum and pursue its push to invalidate the resistance at ₹48,000, which will most probably be breached. Hence, traders can go long in futures and maintain stop-loss at ₹46,200.

A breakout of ₹48,000 can strengthen the rally and therefore the contract could swiftly touch ₹49,000 in the near-term. Above this, gold futures will set its sights on ₹50,000.

As a risk management measure, traders can shift the stop-loss upwards to ₹47,200 if the contract moves beyond ₹48,000.

On the other hand, if the contract drops from Friday’s close, the immediate support levels can be spotted at ₹46,700 and ₹46,000. A decline below ₹46,000 is less likely.

MCX-Silver (₹63,271)

The silver futures made better progress last week in comparison to gold futures. The December contract managed to move above the falling trendline on Wednesday and on Thursday, it closed above the key resistance of ₹63,000 and 50-DMA, a bullish signal. Notably, silver price did not fall, unlike gold, on Friday, thereby outperforming gold on weekly basis.

The bullish undercurrent is substantiated by the RSI and the MACD on the daily chart, as they show steady upward movement and the price action since the beginning of October hints at healthy recovery and high probability of the rally being extended.

Besides, the total number of outstanding open interests (OIs) of all active futures on the MCX went up to 11,937 on Friday from 11,376 contracts by the end of the preceding week. Increase in OI along with an increase in the contract price means fresh long positions are being built-up.

While ₹64,300 can be the nearest resistance, the contract can take this out with ease and appreciate to ₹65,600, where it can pause or even see a minor correction. Resistance above ₹65,600 is at ₹67,700.

Considering the above factors, one can go long at current levels with stop-loss at ₹61,300 for an initial target of ₹65,600. Consider booking partial profits at this level.

If this resistance is invalidated, carry the remaining longs for the subsequent target of ₹67,700. Shift the stop-loss up to ₹64,000 if the contract rallies past ₹65,600. In case the contract falls from current levels, it can find support in the price area of ₹62,500 and ₹63,000. Subsequent support can be spotted at ₹61,500.

Published on October 16, 2021

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