Do bears hold the upper hand in gold?

Akhil Nallamuthu BL Research Bureau | Updated on October 02, 2021

On the regulatory side, the spot gold exchange framework is a welcome step for price discovery

The spot gold exchange, which was under debate for quite some time, seems to be finally taking shape. Last week, the market regulator SEBI came up with a framework through which all recognized stock exchanges can launch instruments through which spot gold can be traded. These are called Electronic Gold Receipts (EGRs) which will be considered as securities, similar to stocks held in dematerialised form. This is expected to make India a price-setter of gold, from being a price-taker. The hope is that supply-demand dynamics in India will have larger influence on domestic price discovery in local exchanges and can improve transparency.

EGRs will be issued by vault providers, who will come under SEBI regulations. They will issue e-receipts i.e., EGRs against the physical gold that they hold and these EGRs will be traded on the proposed gold exchange. An EGR holder can continue to hold it in the electronic form, sell it through the exchange or opt to take delivery of his holdings. The settlement process will be done by clearing corporation just like for stocks.

What it means to traders

Right now, the list of avenues available to take exposure to gold include Sovereign Gold Bonds (SGBs), gold derivative contracts and gold ETFs (Exchange Traded Funds), apart from digital gold and holding coins/bars. Digital gold is not well regulated. The addition of EGRs to this list is a welcome move. For one, it is spot gold, and this has the potential to become the benchmark price in India. Two, there will be no lock-in period and EGRs can be bought and sold at any time. Three, these are not derivative contracts, as in there will be no expiry date like futures and options contract and can hence be held for as long as one wishes to. Four, EGRs, right from launch, will be under regulatory purview.

What it means to jewellery buyers

Should this initiative take off, there will potentially be a benchmark price for gold in the country; jewellery buyers can look forward to better pricing as it enhances transparency. For people who buy jewellery for immediate usage, EGRs may not be suitable. But consumers who plan to buy jewellery for future use can buy EGRs and take delivery of gold at the time of requirement and convert it to desired jewellery. That way, the risk of storage is avoided, and it can be a hedge against the possible increase in price. Through EGRs, one can also space out the investment rather than buying all the required jewellery at one go. One need not worry about safety and purity as these are standardised and are expected to be governed by strict regulations. Finer details like the unit size of the EGR, lot sizes (like 1 gm EGR, 10 gms EGR etc.), minimum quantity that one should hold to be able to take delivery etc. are yet to be known.

While the above were regulatory developments, on the trading front, gold and silver witnessed a volatile week and ended with a gain of 1 per cent each. On the MCX, gold futures closed the week at ₹46,506 (per 10 grams) as against previous weekly close of ₹46,079 and silver futures ended at ₹60,550 compared to preceding week’s close of ₹59,955 (per 1 Kg).

MCX-Gold (₹46,506)

The December futures of gold on the MCX saw its price declining through the first half of last week. This resulted in the contract slipping below the key support of ₹46,000 briefly but recovered and closed at ₹46,506, thereby remaining within the range of ₹46,000 and ₹47,000.While the possibility of futures staying in range is high, there are some bearish indications. The contract is struggling to break past the falling trendline, and the price is below both 21- and 50-day moving averages (DMAs) and bears seems to be constantly attempting to breach the support at ₹46,000.

So, traders can stay on the fence and initiate fresh short positions only if the contract slips below the previous low of ₹45,705. A dynamic stop-loss is recommended for this position i.e., keep initial stop-loss at ₹46,700 (21-DMA )and revise it down as and when 21-DMA moves lower; don’t revise upwards.

A break down from ₹45,705 means the contract can touch the immediate support at ₹45,000. Subsequently, it could even depreciate to ₹44,200. But on the other hand, if the contract moves beyond ₹47,000, it can set its sight on the resistance band at ₹47,800 and ₹48,000.

MCX-Silver (₹60,550)

On Wednesday last week, the December futures of silver on the MCX breached the support at ₹59,200. This seemed like the bears have gained complete control and that the futures is heading for a free fall.

However, bulls fought back strongly and pushed the price upwards resulting in a weekly close at ₹60,550. Although this is does not mean a shift from medium-term downtrend, the chances of a minor recovery have not died out. Therefore, the contract can see a rally to the resistance band of ₹61,500 and ₹62,500.

So, traders can short silver futures if the price recovers to the price area of ₹61,500 and ₹62,500 and place stop-loss at ₹63,700 – its 50-DMA. The nearest supports from the afore-mentioned price band i.e., ₹59,220, and ₹58,000, can be the possible targets for the shorts.

But note that if the contract decisively breaches ₹62,500, the short-term trend can turn bullish and therefore, the futures can rally to ₹64,200 and ₹65,500.

Published on October 02, 2021

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