Derivatives

Gold to sparkle as investment demand returns

Akhil Nallamuthu BL Research Bureau | Updated on June 12, 2021

Although daily chart appears sluggish, the MCX August expiry contract still exhibits bullish bias

Investment demand seems to be coming back to bullion. Latest World Gold Council (WGC) data shows positive net inflows in gold Exchange Traded Funds (ETF) in May, reversing three straight months of net outflows. The data reveals that global gold ETFs added 61.2 tonnes last month. Initial reaction from the market to this number has been muted. However, if the investment demand, which was the major driver for the price rally during the last couple of years, continues to grow in the coming months, it can prop up prices.

The US 10-year yield, which has been quiet in the last couple of months, declined last week to close at 1.45 per cent on Friday compared to 1.56 per cent before a week. Falling yield is positive for bullion as it reduces the opportunity cost for holding it. But US government data released last week showed consumer price index (CPI) increasing by 5 per cent, the largest 12-month increase since the 5.4 per cent number recorded in August 2008. As long as the Federal Reserve sees inflation as transitory, there may not be a rate hike, which is supportive for the bullion. Otherwise, the prices can come under pressure. One should keenly watch the Fed policy decisions next week.

On the price front, gold was largely flat whereas silver saw marginal appreciation in price last week. Gold closed without much change at $1,877.7 (per ounce) in dollar terms and on the Multi Commodity Exchange (MCX), the futures ended at ₹49,198 (per 10 grams). Silver posted marginal gain and ended at $27.94 (per ounce) and at ₹72,227 on the MCX.

MCX-Gold (₹49,198)

Extending the sideways movement, gold futures (August expiry) on the MCX traded in a tight range last week. The price action in the last three weeks has been limited to range of ₹48,600 and ₹49,700. Therefore, technically, the near-term trend is flat and the direction of the break from the consolidation range can offer clues on the possible trend. However, until the futures price stays above the base of ₹48,600, the likelihood of a rally is high. Giving the contract a positive inclination, the relative strength index (RSI) and the moving average convergence divergence (MACD) indicators on the daily chart continue to stay in the bullish zone. The price is ruling above the 50-day moving average, keeping the long-term trend intact.

Although the daily chart appears sluggish, the contract still exhibits bullish bias, and the major trend is supportive for the same. Hence one can consider being on the long side of the trade. The price is expected to break out of range and rally past the critical level of ₹50,000. The upward move can accelerate above this level with the nearest resistance at ₹51,000. But in case the contract breaks below ₹48,600, the near-term outlook can turn negative. So, long positions need to be backed by strict stop-loss below ₹48,600. Immediate support below this level is ₹48,100 where the 50-DMA lies.

MCX-Silver (₹72,227)

Even though silver futures performed better than gold futures last week, the former (July expiry) continued to stay within the price band of ₹70,000 and ₹72,800. Though it marked a high of ₹74,222 in mid-May, the contract could not sustain above that level and dropped back to the above-mentioned range. Even as the contract looks flat, there are some elements which hint at a positive bias.

The price is above 21- and 50-DMA and the latter has protected the bulls twice in the past month by offering considerable support. The RSI, which has been flat recently, is now showing fresh uptick and the MACD, which has been tracing a downward trajectory for about a month, is now turning up. These are indications of the uptrend gaining traction, which is also signalled by the average directional index (ADX). Moreover, the outstanding open interest of all active futures contract increased over the past week i.e., on Friday, it was at 12,975 contracts compared to 11,860 contracts a week back. Increase in open interest along with increase in price is a bullish sign.

One can maintain a bullish view and buy the contract as the above factors indicate bullish inclination. On the upside, the contract has the potential to cross-over the important level to rise towards ₹75,000 in the short-term. Above this level, it can touch ₹77,500. The 50-DMA lies at ₹70,525 and thus, the price band of ₹70,000 and ₹70,525 will offer a strong support. Nearest support below that level can be seen at ₹68,000.

Published on June 12, 2021

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