Derivatives

Can gold touch ₹50,000 this week?

Akhil Nallamuthu BL Research Bureau | Updated on May 31, 2021

Continued strength of the rupee against dollar, however, could cap gains for domestic traders

The US Bureau of Economic Analysis released preliminary US GDP (Gross Domestic Product) data for Q1 2021 last week, which was in line with the advance estimate of 6.4 per cent. The data showed sequential improvement in GDP growth as the number for the preceding quarter was at 4.3 per cent. Notably, the release stated that personal consumption expenditure (PCE) increased by 3.7 per cent, slightly higher than the advance estimate of 3.5 per cent.

Also, the US Department of Labour release showed that weekly unemployment claims fell to their lowest levels since March 2020; there has been a steady decline over the last four weeks. It stood at 4,06,000 last week against 5,53,000 in the final week of April. The increase in PCE and decrease in unemployment claims, adds strength to the view that the Federal Reserve may be inching closer to considering a tapering of its asset purchase program. After the data was out, the dollar appreciated slightly, dragging down the bullion.

Nevertheless, on the trading front, gold continued to attract buyers as net long positions saw an increase for the second straight month. According to the Commodity Futures Trading Commission (CFTC), net long positions on the COMEX in May increased to 642.2 tonnes from 563.9 tonnes in April. This is a positive as speculators seem to see better prospects for the yellow metal.

As a result, gold, which gained in the first half of the week, gave up some ground and ended with a weekly gain of 1.2 per cent as it closed at $1,902.6 (per ounce). Silver produced a gain of 1.3 per cent and closed at $27.88 (per ounce). Since the rupee advanced by 0.6 per cent against the dollar, gold and silver underperformed in rupee terms. Gold futures (August expiry) and silver futures (July expiry) on the Multi Commodity Exchange (MCX) produced a gain of 0.5 and 0.7 per cent as they closed at ₹49,150 (per 10 grams) and ₹71,611 (per kg), respectively.

MCX-Gold (₹49,150)

The futures contract of gold on the MCX, which started slow, began gaining momentum and rallied in the first half of last week. But after registering a high of ₹49,674 on Wednesday, the contract reversed direction. After declining in subsequent sessions, it closed at ₹49,150. The price movement of the past two weeks shows that the contract has been moving within a tight range of ₹48,600 and ₹49,500. As the trend was largely flat, outstanding open interest in the active futures contract dropped to 13,176 contracts from 14,556 contracts a week ago.

The 21-day moving average (DMA) lies at ₹48,400 and therefore the price band of ₹48,400 and ₹48,600 will offer good support. The trend will remain bullish so long as the price remains above this support band. Corroborating the bullish trend, the relative strength index (RSI) and the moving average convergence divergence (MACD) indicators stay in their respective positive territory and the average directional index (ADX) shows that the rally has not lost traction and bulls are stronger than bears as it stands.

As the trend retains an upward bias, traders can hold existing longs or initiate fresh buys on dips. The contract is likely to touch ₹50,000 in the near-term. A breach of this level can result in a quick rally to ₹51,000. While ₹48,600 is the closest support, subsequent supports are at ₹47,650 and ₹47,000.

MCX-Silver (₹71,611)

The July futures contract of silver on the MCX has been charting a sideways trend for the past three weeks. Even though it made a high of ₹74,222 a couple of weeks ago, it could not sustain that gain and was largely fluctuating within ₹70,000 and ₹72,500.

While the price is above the critical support of ₹70,000 and above 50-DMA, there are certain indications that signal weakening bulls. The RSI has gradually declined in the last couple of weeks and is now hovering in the neutral region. A slip below the mid-point of 50 would give the contract a bearish bias. The MACD however remains in the bullish zone and is turning the trajectory downwards. The number of outstanding open interest of the active futures contract dropped to 10,841 contracts from 11,406 contracts over the past week.

Despite the above indications, one can wait for the contract to get out of the range of ₹70,000 and ₹72,500 before pulling the trigger. The direction of break out could give us clues on the next leg of short-term trend. A decisive breakout of ₹72,500 can turn the trend bullish wherein the contract could rise to ₹75,000. Above this level, it could touch ₹77,500. Whereas a breach of the support at ₹70,000 could invite selling interest which can drag the futures to ₹68,000.

Published on May 29, 2021

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