Derivatives

Can gold prices rebound from lows?

Akhil Nallamuthu | Updated on March 06, 2021

Silver is trading above a trend-defining support level of ₹65,000

The chain reaction set off by rising treasury yields in the US resulted in dollar strengthening as the demand for dollar-denominated assets went up. Consequently, the prices of bullion have been taking a hit. As prices dropped, there have been considerable outflows from the exchange traded funds (ETFs), weighing on the bullion.

As per WGC (World Gold Council) data, ETFs have seen a net outflow amounting to 84.7 tonnes in February. While an inflow of 13.9 tonnes in January provided some comfort after outflows in the preceding two months, investors seemed to pull out last month as well. Asia remained the only region that saw inflows.

Last week, the US 10-year treasury yield increased and closed at 1.577 per cent on Friday compared to about 1.41 per cent a week before. This lifted the dollar and as a result, the dollar index – a measure of the dollar against a basket of six major currencies – ended at 91.98 on Friday, posting a weekly gain of 1.2 per cent. Notably, it registered a four-month high of 92.2 on Friday.

As the above developments occurred, the price of gold and silver plunged. Gold futures (April series) on the Multi Commodity Exchange (MCX) closed the week at ₹44,683 (per 10 grams), losing 2.3 per cent for the week.

Similarly, silver futures (May series) ended the week at ₹66,166 (per Kg), down by 1.6 per cent for the week. In dollar terms, gold and silver lost 1.9 per cent and 5.4 per cent as prices on Friday closed at $1,700.8 and $25.19 per ounce, respectively. Prospects seem to be weak for bullion as yields and the dollar are expected to firm up further. However, an increase in inflation can limit the downtrend to some extent.

MCX-Gold (₹44,683)

Bear dominance is very evident as the April futures of gold on the MCX extended the fall and broke the key support band of ₹44,700 and ₹45,000. The contract, whose short-term trend is bearish, has potentially turned the medium-term trend negative.

The precious metal can remain under pressure for the next two to three quarters. For it to reverse, prices should decisively go past ₹46,500 and until then, the field is in favour of the bears.

The downward inclination is well-supported by indicators like the relative strength index (RSI) and the moving average convergence divergence (MACD). Both the indicators are in their respective bearish territory in both daily and weekly charts. But we should take note that these indicators are approaching over-sold levels on the daily chart. While this can result in a corrective rally, the price should breakout of ₹46,500 for the uptrend to strengthen. The average directional index (ADX) is showing a strong downtrend and there are no signs of it weakening.

Because of the above-mentioned reasons, traders can be bearish as long as the futures price trades below the key level of ₹46,500 and rallies can be utilised to initiate fresh short positions.

The current decline is expected to drag the contract to ₹43,800 – its nearest support. Subsequent support levels can be spotted at ₹43,250 and ₹42,275. Investors can stay away for a while and look for evidence of a trend reversal before making further long-term investments in the yellow metal.

MCX-Silver (₹66,166)

Silver, which stood strong against the initial bear assault, lost its strength, and posted a loss of 1.6 per cent last week after staying flat for almost a month. Thus, four weeks of outperformance of silver against gold has come to an end and the May futures of silver on the MCX has moved out of the range of ₹68,700 and ₹72,000; it even marked a seven-week low of ₹64,875 before wrapping up the week at ₹66,166 on Friday. So, the contract managed to close above an important support of ₹65,000.

The RSI and the MACD on the daily time frame have been moving around the neutral region in the past month. But following the last week’s fall in price, they have slipped into their negative zone. The ADX shows that the downswing is showing good traction and the price has sunk below both 21- and 50-day moving averages (DMAs). Hence, like gold, the chances of more moderation in price are high.

The 200-DMA lies at ₹65,380 and so the price band of ₹65,000 and ₹65,380 can offer some support. Hence, rather than initiating sell in silver futures at current levels, traders can wait for the contract to breach ₹65,000 before getting in on the short side. A breach of ₹65,000 can result in a quick decline towards the nearest support at ₹63,000. In case this support gives up, the price can touch ₹61,000. Like in gold, long-term investors can wait to see bullish confirmation before adding more silver in the portfolio.

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Published on March 06, 2021
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