Bullion cues: Fresh Covid concerns may boost gold

Akhil Nallamuthu | Updated on March 27, 2021

Rising number of cases is a major worry, which can push up demand for safe-haven assets

A third Covid wave has hit Europe, raising fresh concerns about countries extending lockdown measures. There were encouraging economic indications mid-week as the European Purchasing Managers Index (PMI) showed improvement i.e., flash manufacturing PMI improved in February to 62.4 compared to previous month’s 57.7 whereas flash services PMI bettered to 48.8 from 45.7 during the corresponding period. However, a rising number of cases in several countries in the bloc is becoming a major worry; coupled with it is the shortage of vaccine. Thus, uncertainties seem to be creeping in and if situation worsens it can potentially help bullion. The number of cases in India, the second largest importer of the precious metal, is on the rise as well.

The US dollar gained on the back of better-than-expected GDP growth numbers last week. According to the US Bureau of Economic Analysis (BEA) the GDP expanded by 4.3 per cent in December quarter of 2020 as against the expectation of expansion of 4.1 per cent. Although it was the third estimate, the dollar index rallied and it closed the week with a gain of nearly one per cent as it ended at 92.77 on Friday.

Nevertheless, gold prices largely remained unaffected by the above developments and continued to trace a rectangular price patter. The yellow metal closed marginally lower at $1,732 an ounce compared to previous week’s $1,744.7. However, silver was relatively weaker as it closed the week lower at $25.04 an ounce compared to $26.24 – its preceding week’s close.

A similar trend was seen in gold in India too. Gold futures (April expiry) on the Multi Commodity Exchange (MCX) ended lower by 0.8 per cent at ₹44,642 (per 10 grams) as against previous week’s close of ₹45,021 whereas silver futures (May expiry) on the MCX closed at ₹64,805 (per Kg) versus preceding week’s close of ₹67,527, losing 4 per cent.

MCX-Gold (₹44,642)

Extending the sideways trend for the third week, the April futures contract of gold on the MCX continued to trade in the narrow price band of ₹44,600 and ₹45,100 over the past week. Thus, the near-term trend is unclear, and the likely direction of the next price swing can be predicted based on whether ₹44,600 or ₹45,100 level is breached first. A breakout of ₹45,100 can result in the contract heading towards the resistance of ₹46,000, above which it can test the crucial hurdle of ₹46,500 where the 50-day moving average (DMA) coincides. A breach of this level can possibly re-establish the long-term bull trend.

On the other hand, if the contract slips below the support of ₹44,600, bears can regain the momentum they have lost over the last three weeks. The prior low of ₹44,150, made in early March, can offer support for the contract. But if this level is decisively taken out, the sell-off can intensify. Notable supports below the previous low can be spotted at ₹43,000 and ₹42,300.

The chart for gold futures looks mixed up i.e., there are signs substantiating both bulls and bears. The daily relative strength index (RSI) has been rising over the past couple of weeks despite the contract moving flat which signals that uptrend is gaining momentum. However, the futures continue to remain below both 21- and 50-DMAs. Given the prevailing price action, traders and investors with near-term and long-term time horizons can hold back from initiating fresh positions until there appears clear signals of a trend on either direction.

MCX-Silver (₹64,805)

Unlike gold futures which ended flat last week, the silver futures (May expiry) looked weaker in comparison. Even as the contract began the week on a flat note, it declined during the first half and then remained flat until Friday. Thereby, silver futures has lost 4 per cent as it closed at ₹64,805 on Friday compared to previous week’s close of ₹67,527. But despite the fall, silver futures remain above the crucial support of ₹65,000 and therefore stays within the range of ₹65,000 and ₹68,700 within which it has been consolidating since March.

Noticeably, the contract is displaying a bearish inclination – the price has gone below the 200-DMA. The MACD on the daily chart, which lies in the negative territory, is showing a fresh downtick. The average directional index (ADX) is hinting that the sellers are gaining traction. Also, the daily RSI, though stays flat, is hovering in the bearish zone. Going by these indications, if the support of ₹65,000 is breached, the contract will most probably witness a leg down.

Hence, traders can short the contract for the near-term if the price decisively breaks below the base of ₹65,000; stop-loss can be placed at ₹67,000. On the downside, the contract might depreciate to ₹62,000, which can be a support. The subsequent support is at ₹60,000. Ideally, investors and traders looking for long-term opportunities can wait until solid bullish signals appear.

Published on March 27, 2021

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