Derivatives

Gold on comeback trail

Akhil Nallamuthu BL Research Bureau | Updated on July 17, 2021

Silver continues to lag and the trend remains unclear

The World Gold Council (WGC) in its mid-year outlook has said gold is heavily influenced by interest rate movements. Increase in rates can create headwinds for the yellow metal. However, the report added that central banks can be cautious and even as there are risks, there are also opportunities. Gold could have upside potential from new variants of coronavirus, an accelerated economic recovery, or inflation. As investors have added more risk to their portfolios due to the ultra-low interest rate environment, they have a case for adding gold for downside protection and diversification. The report also shows that momentum has been the biggest driver in June quarter.

Momentum can sustain given that the net long positions for gold in the COMEX are showing signs of improvement this month. The net longs had declined in June after rising in the preceding two months. The Commitment of Traders (COT) report published by the Commodity Futures Trading Commission (CFTC) shows that net longs in July stood at 612 tonnes compared to 632 tonnes in June. Given bullish inclinations, net long positions can improve considerably in the latter half of this month.

From the perspective of weekly change in price, gold ended the week marginally higher whereas silver closed lower. Gold posted a minor gain of 0.3 per cent each in terms of dollar and rupee as it closed at $1,812.2 (per ounce) and at ₹48,053 (per 10 grams) (August futures). Silver ended the week at $25.67 (per ounce) and at ₹68,319 (per one kg) (September futures) in terms of dollar and rupee, respectively, losing about 1.5 per cent each.

MCX-Gold (₹48,053)

Gold futures, which slowed down after facing an obstacle at ₹48,000, managed to breach this level last week and closed at ₹48,053 on Friday. Although it began the week on a weak note, the contract took support of ₹47,500 and turned upwards. In subsequent sessions, the contract gradually gained and moved beyond ₹48,000 as well as the 50-day moving average and registered a fresh monthly high of ₹48,501 on Thursday. The contract appears bullish, and is likely to appreciate further.

Reinforcing bullish undertones, the daily relative strength index (RSI) has moved above the mid-point level of 50, a positive indication, and the moving average convergence divergence (MACD) on the daily chart is on the verge of entering bullish territory from the neutral region. The contract has closed in the green for four consecutive weeks and the weekly chart shows that it has formed a higher base in price range of ₹46,500 and ₹47,000, which can be an indication that the bulls are taking control. But the number of outstanding open interest (OI) of all active futures contracts dropped to 14,637 from 15,015 over the past week, a sign of caution. Unless the contract falls below ₹46,500, the trend for the rest of the year will show upward inclination.

The contract faces 200-DMA resistance at around ₹48,520. Nevertheless, considering the prevailing price action, the contract will most likely rally past this level and test the next resistance at ₹49,300 and it can even touch the critical level of ₹50,000. Hence, traders can consider going long in futures. But in case the uptrend loses traction and sellers capitalise on it and drag the contract below ₹48,000, it might decline to the support band of ₹47,250 and ₹47,500, where 21-DMA coincides. Chances of this support being breached are low.

MCX-Silver (₹68,319)

The underperformance of silver continues as it struggles to find direction and continues to trade sideways. It was held within the price levels of ₹67,700 and ₹70,000. Despite the futures charting a sideways trend at broader level, it lost about 1.5 per cent last week accompanied by an increase in the number of outstanding OI of all active futures contracts – to 13,314 on Friday compared to 11,116 before a week back. Though this is a bearish signal, the next swing in price will be unclear until the contract continues to remain within the range.

The contract carries a negative bias which can be observed on the charts as well. Indicators – the RSI and the MACD – though has remained flat since past couple of weeks, they stay in their respective bearish zones. The average directional index (ADX) shows that bears have more strength.

Thus, traders are recommended to stay on the sidelines until the futures either break ₹67,700 or ₹70,000. A clear breakout of ₹70,000 can induce substantial positive momentum and consequently, the contract can be expected to ease past the immediate hurdle at ₹71,300 and touch ₹72,000. Above this level, the price could rally to ₹73,000. On the other hand, if the contract slips below the crucial support of ₹67,700, the short-term trend can turn weak. Below this support, the sell-off can intensify and the contract can decline to ₹65,000.

Published on July 17, 2021

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