Derivatives

Can gold now reclaim ₹50,000 level?

Akhil Nallamuthu BL Research Bureau | Updated on May 08, 2021

After a brief consolidation, bullish signs emerge with gold futures likely to cross ₹48,500

Exchange Traded Funds (ETFs) across the world saw net outflows of 18.3 tonnes in April according to the latest data by the World Gold Council (WGC). With that, ETFs have seen outflows for six out of the last seven months. In a silver lining, the outflows have slowed down significantly from 105.6 tonnes in March as the European region helped counter balance flows. ETFs across the region remained net buyers, adding 10.6 tonnes.

North America saw a net outflow of 28.4 tonnes last month. According to WGC, gold assets under management (AUM) have fallen nearly 14 per cent from their peak in November 2020, out of which 8 per cent is due to the outflows and the remaining due to the price drop in dollar terms. Nevertheless, the slowdown in outflows is a positive factor and the recent rise in price could bring back investors towards gold ETFs.

Besides a slowdown in ETF outflows, net long positions of gold on COMEX increased for the first time in the last four months. According to the Commitment of Traders (COT) report released by the Commodity Futures Trading Commission (CFTC), the net longs in April increased to 563.9 tonnes from 528.7 tonnes in March. This can be attributed to the recent increase in prices and as gains sustain, it can be expected to improve further.

On the domestic price front, gold futures (June expiry) on the Multi Commodity Exchange (MCX) gained 2.2 per cent as it ended at ₹47,751. Similarly, silver futures (July expiry) on the MCX posted a weekly gain of 4.5 per cent by closing at ₹71,429 on Friday. Gold and silver appreciated in dollar terms as well. While the yellow metal gained 3.6 per cent to end at $1,831.1 per ounce, silver went up 6 per cent and closed at $27.46 per ounce. As the rupee bettered the dollar last week, the return in rupee terms was lower.

MCX-Gold (₹47,751)

The support at ₹46,500 put an end to the correction in gold futures (June expiry) on the MCX as the contract moved up on the back of this base after a brief consolidation. The price is now back above the 21-day moving average (DMA) and the rally last week could be an indication that the futures is establishing another leg of rally. A breakout of the resistance at ₹48,500 can affirm this. Whatsoever, the run up during last week suggests that the recent moderation is nothing more than a corrective decline. The year-to-date loss has come down to 4.9 per cent.

Indicators such as the relative strength index (RSI) and the moving average convergence divergence (MACD), which have been pointing downwards over the past couple of weeks, are now showing a fresh uptick signalling that the bulls are regaining traction. The average directional index (ADX), which shows the strength of a trend, indicates that the uptrend is strengthening well. Reinforcing the positive bias, the open interest of all active gold futures has increased to 14,336 lots from 13,826 lots a week ago.

The above factors give us a clear bullish sign and so, the futures is likely to crossover the nearest resistance ₹48,500. A breach of this level can intensify the rally which could lift the contract to the psychological level of ₹50,000 with ease. Yet, those who would prefer to play it safe can take long positions if ₹48,500 is invalidated. The immediate support is the price band of ₹46,500 and ₹46,000 with a subsequent support at ₹45,000.

MCX-Silver (₹71,429)

Silver futures (July series) opened last week on the front foot and rallied on Monday. While the ensuing couple of trading sessions were sluggish, the contract picked up momentum towards the end of the week. As a result, the futures rallied past the prior high, which is also a strong resistance, of ₹71,500 and marked an intra-week high of ₹72,231 on Friday. However, the price then softened as the contract closed at ₹71,429 just around the important level. Year-to-date, silver, by gaining 2 per cent, has out-performed gold.

The support at ₹68,300, where the 50-DMA coincides, stopped the bears from extending the decline. The price action indicates that silver futures is turning the trend bullish and a clear break of ₹71,500 can bring in more buyers helping the contract to reinforce the uptrend. The RSI and the MACD on the daily chart are showing renewed upward momentum and the 21-DMA has crossed over the 50-DMA, a sign that the medium-term trend is becoming bullish. Supporting the same, the open interest in active silver futures has gone up to 10,033 lots from 9,073 lots a week ago. Increase in price and increase in open interest shows long build-ups in the contract.

The stage seems to be set for the bulls to tighten their grip and so chances of the resistance at ₹71,500 being taken out is high. Once this occurs, the contract can face an immediate hurdle at ₹72,800.

However, this level can be taken out effortlessly following which the bulls may take the contract towards ₹75,000. Notable supports for the contract are at 68,300 and ₹67,000. Traders and investors can consider fresh long positions.

Published on May 08, 2021

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