Derivatives

Has gold turned bearish?

Akhil Nallamuthu | Updated on January 09, 2021

Gold and silver prices crashed on Friday; now below short-term support levels. But long-term support still holds good

Courtesy US dollar, gold and silver witnessed higher volatility last week. The dollar was kept busy by the latest developments in the US such as run-off election results in Georgia and violent protests that followed. On Monday, both gold and silver saw a strong openings as prices saw an initial thrust upwards. But the rally was capped mid-week and prices declined for the rest of the week.

The price of gold futures on the Multi Commodity Exchange (MCX), after marking a high of ₹51,875 (per 10 grams) on Wednesday, ended the week at ₹48,967, losing 2.5 per cent over the previous week.

The price of silver futures on MCX made a high of ₹71,550 on Wednesday (per kg) before closing the week at ₹64,231, losing 5.7 per cent.

In dollar terms, gold closed the week at $1,849 (per ounce), down by 2.6 per cent whereas silver closed at $25.42 (per ounce), down by 3.7 per cent.

While factors have not been encouraging for gold over the past few months, the month of December saw an improvement on the COMEX net long positions. After witnessing a decline for four months in a row, net longs went up last month. On Januray 5, 2020, they stood at 822 tonnes compared to 748 tonnes at the end of November, according to the World Gold Council data.

This is a positive sign and sentiment might be turning bullish. Going forward, if there is consistent build-up in long positions, it can give a substantial push to prices of the yellow metal. Eventually, silver prices can follow.

MCX-Gold (₹48,967)

It was a strong beginning for gold futures on MCX last week as it bounced off the support at ₹50,000. The rally resulted in the price touching a high of ₹51,875, the highest in almost two months. But there was a hasty turnabout in the trend mid-week and the contract started to dip. On Friday alone, the price tumbled by 4.1 per cent. Consequently, the February futures contract ended at ₹48,967 on Friday, losing 2.5 per cent in a week.

Unable to withstand the onslaught by bears, the contract slipped below both 21- and 50-day moving averages (DMAs); also below the key level of ₹50,000, giving a negative outlook.

While the long-term bull trend stays valid, the futures closing below ₹50,000 means the contract can be under pressure in the short run. Though the price level of ₹48,600 can offer support, looking at the nature of fall, the contract might extend the fall towards the support band of ₹47,600 and ₹48,000.

One should be cautious because a breach of this support band can shift the medium-term trend negative, turning the game in favour of bears. The immediate support below ₹47,600 is at ₹45,775.

On the other hand, if the bulls reclaim control and lift the contract back on the upward track. The price levels that can be near-term hindrances are ₹50,000, ₹51,800 and ₹52,500. But remember that the overall trend is up, and the futures price can be expected to touch ₹56,000 within a year and rise to ₹60,000 and possibly to ₹65,000 in two to three years.

MCX-Silver (₹64,231)

Like gold futures, silver futures too began last week on the front foot. After a minor gap-up open, the contract soared to hit a high of ₹71,550 and eventually the sellers overturned the direction, resulting in the contract closing at ₹64,231. In Friday’s session the contract posted a substantial loss of 8.7 per cent and therefore, it ended the week lower by 5.7 per cent compared to the preceding week’s close of ₹68,123.

Silver futures underperformed gold futures over the past week and this can be attributed to the volatile nature of silver.

Since the bears succeeded in pulling the contract below the important base of ₹67,800, where the 21-DMA coincides, there seems to be a threat for the bulls in the forthcoming sessions. Even though the contract has not invalidated the support band of ₹65,270 and ₹63,000, the decline accompanied by huge volume indicate that a recovery might take some time and there is a possibility for some more moderation in futures price before staging a recovery. Notable support levels below ₹63,000 can be spotted at ₹61,350 and ₹60,000.

Nevertheless, the over-all trend will have a leaning towards upswing until the contract trades above ₹58,000; the price can potentially hit ₹80,000 and ₹85,000 over a two- or three-year time horizon. Over the course of the rally, it can face hurdles at ₹71,500 and ₹75,000.

Published on January 09, 2021

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