Derivatives

How long will rising yields drag gold prices

Akhil Nallamuthu | Updated on March 20, 2021

The 10-year US Treasury yield marked a 14-month high of 1.754% on Thursday

The US Federal Reserve (Fed), on the expected lines, maintained status quo with respect to the federal funds rate at zero to quarter per cent last week. In fact, the dot plot showed that the rate is likely to stay at current levels through 2023 and as per the Federal Open Market Committee (FOMC) statement, the bond buying programme will be continued at the current pace until the committee deems it necessary to change tack.

This disappointed the dollar bulls, and the initial reaction was a decline, though the greenback made a recovery in subsequent sessions. The dollar index ended the week higher at 91.92 as against previous week’s 91.68. But markets refused to be convinced by Fed actions and bond yields continued to rise. The 10-year treasury yield hit a 14-month high of 1.754 per cent on Thursday before closing the week at 1.73 per cent; in the previous week it ended at 1.625 per cent.

Consequent to this, bullion which saw a temporary rise in price gave this away quickly and posted a marginal loss for the week.

In dollar terms, gold closed the week at $1,744.7 per ounce versus preceding week’s close of $1,726.4 and silver ended at $26.24 per ounce compared to $25.91 – its previous week’s close. In rupee terms, gold futures (April expiry) on the Multi Commodity Exchange (MCX) closed at ₹45,021 (per 10 grams) against the previous week’s close of ₹44,750 whereas silver futures (May expiry) ended at ₹67,527 (per Kg) compared to the preceding week’s close of ₹66,844. There is an upward revision in the latest economic projections for 2021 compared to that in December. While US GDP growth is revised up to 6.5 per cent from 4.2 per cent, the core inflation is expected to be at 2.2 per cent compared to the previous forecast of 1.8 per cent.

This can induce some optimism going ahead because of which the yields can continue to rise, suppressing the bullion prices more.

MCX-Gold (₹45,021)

Apart from a temporary increase in volatility on Thursday following the announcements from the Fed, the April futures contract of gold on the MCX was sluggish all through the week. The contract remained below the resistance at ₹45,000 thereby lingering below the potential trend-defining level of ₹46,500. The 21-day moving average (DMA) lies at ₹45,300 and thus, the price band of ₹45,000 and ₹45,300 will be a considerable hurdle for the bulls to crack.

The technical indicators on the daily chart are giving mixed signals. The relative strength index (RSI) is flat whereas the moving average convergence divergence (MACD) is showing some sort of optimism as the slope is turning positive. The average directional index (ADX), which was bearish following the decline over the past couple of months, now hints at the bears losing momentum; but on other hand, it shows that the bulls have not really gained traction, essentially indicating that there is no underlying momentum either way.

Along with the above signs, considering that the contract is trading within the important levels of ₹44,000 and ₹45,000, it is better to stay away from taking fresh positions. The direction of the break of this price band can provide us with clues about the short-term trend. Resistance levels above ₹45,000 are at ₹46,500 and ₹47,000 whereas supports below ₹44,000 are placed at ₹43,000 and ₹42,300. Traders and investors looking to make long-term entries can wait for now. A possible rally above ₹46,500 can establish an uptrend.

MCX-Silver (₹67,527)

Analogous to gold futures, silver futures (May expiry) were also trading in a narrow range over the past week. However, the performance of silver since the beginning of the current year has been better than gold. While silver futures has lost 2.2 per cent year-to-date, gold futures has depreciated by 10.3 per cent. Moreover, unlike gold, the futures contract of silver continues to trade above the base of ₹65,000 and the key 200-DMA support, which now lies at ₹66,110. This means that the silver has good chance to outperform gold, at least in the near-term. But indicators like the RSI and the MACD are flat and there are no signs of silver establishing a trend yet.

The contract should breach either ₹65,000 or ₹68,700 to confirm the next leg of trend and until then one can stay on the sidelines. While the breakout of ₹68,700 can lift the contract to ₹72,000, a breach of the support at ₹65,000 can result in bears dragging it to the nearest support at ₹63,000. Long-term investments and trades can wait until silver shows clear signs of bullishness. Perhaps a move above the psychological level of ₹70,000 can turn the tide in its favour.

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Published on March 20, 2021
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