Gold and silver in long-term uptrend

Crude oil, gold and silver are the top drawers when it comes to trading in commodity derivatives. These three commodities attract more traders and eventually higher trading volumes. As a result, they are the top constituents of the composite index of the Multi Commodity Exchange (MCX).

The weight of crude oil, gold and silver on the iCOMDEX Composite index, are approximately 35 per cent, 23 per cent and 13 per cent, respectively, adding up to 70 per cent. We examine how these commodities can fare in 2021.

Since each contract has a pre-defined and limited trading time-frame with an expiry date, for analysis purpose, nearest expiry futures contract on continuous basis are considered for all three commodities.

MCX-Crude oil futures (₹3,527)

2020 was an action-packed year for crude oil and it even saw futures price dropping below zero briefly, something that has never never happened in its history.

Right from the beginning, crude oil futures were under the bear grip and eventually it slipped below the prior low of ₹2,993 in February. Post this, the sell-off intensified and in an unprecedented move, the price dropped to negative levels in April.

But what followed was a drastic shift in the trend. As the tide turned in its favour, crude oil futures was quick in establishing an uptrend where it accelerated to ₹3,200 by July. This price level was a strong hurdle for the bulls and so the contract started consolidating between ₹2,670 and ₹3,200. In the last week of November, the contract pierced through ₹3,200 turning the outlook positive.

Going forward, the resistance at ₹3,600 can apply brakes on the rally in the short run. However, the price action in weekly chart looks steady, meaning the crude oil futures can potentially move past ₹3,600 and can touch ₹4,000 in 2021. Bulls will be in the driving seat until price stays above ₹3,200 – an important support.

MCX-Gold futures (₹50,235)

Gold produced hefty returns in 2020 as it lengthened the uptrend from 2019. This resulted in gold futures appreciating by about 28 per cent last year. Yet, since mid-August, the futures price has been under pressure wherein it lost 10 per cent from its all-time high of ₹56,191.

Though the decline seems deep, it is marginal compared to the stretch of rally it had witnessed since June 2019. Hence, it can be too early to call this drop a trend reversal.

Gold futures can face near-term pressures as it struggles to establish a trend. However, the medium- and the long-term uptrend will be intact until it remains above the key support band of ₹46,650 and ₹47,600. A breach of ₹52,300 can bring back the lost momentum and re-establishing the rally.

While ₹52,300 can be the nearest hindrance, gold futures can be expected to regain its mojo back this year, possibly moving upwards to ₹56,200 before the end of this year; it can even head towards ₹60,000.

MCX-Silver futures (₹68,120)

Silver futures produced substantial return of nearly 46 per cent in 2020. Despite a sharp fall to ₹33,580 in March 2020, it reversed direction quickly and rallied to hit an all-time high of ₹77,949 in August. But thereafter, the futures lost steam and tumbled by a little over 12 per cent from ₹77,949 to mark a low of ₹56,020 in September.

Nevertheless, the price area between ₹55,765 and ₹58,000 proved to be a good support band. So long as the price stays above these levels, the medium-term and long-term trend will remain bullish.

Before a couple of weeks, the futures crossed over a resistance level of ₹65,800, which had restricted the bulls during the preceding three months. This breakout has made silver look more bullish in the near-term than gold. If the futures can keep up the momentum and break out of ₹71,000, it can potentially appreciate towards the price band of ₹78,000 and ₹80,000 within one year.