Derivatives

Is gold headed for more hiccups this week?

Akhil Nallamuthu BL Research Bureau | Updated on May 01, 2021

Rising open interest along with a dip in prices could be a bearish signal

Lower prices seemed to have coaxed bullion consumers back into the stores in the first quarter of 2021. The latest demand-supply statistics released by World Gold Council (WGC) show that jewellery demand was 52 per cent higher at 477.4 tonnes compared to the same quarter in 2020. However, there was a sequential decline, as the demand in Q4 2020 was 511 tonnes.

Jewellery demand has minimized the effect of outflows from exchange traded funds (ETFs) to the extent of 178 tonnes in Q1 2021. ETFs had seen an inflow of 299 tonnes in the corresponding quarter last year. Demand in the form of bars and coins stood at 339.5 tonnes, up 89 per cent as against 250.5 tonnes in Q1 2020. Overall, quarterly demand dropped by 23 per cent to 815.7 tonnes compared to about 1,060 tonnes in the first quarter of 2020. Notably though, after witnessing a decline for six consecutive quarters, total demand in Q1 2021 stayed at almost the same level of the previous quarter.

Despite positive signals on demand, the impending effect of the pandemic weighed heavily and both gold and silver saw price declines last week. The rupee strengthened 1.3 per cent against the dollar last week, therefore, the bullion price decline in terms of domestic currency was higher. Gold futures dropped 1.7 per cent and closed at ₹46,737 (per 10 grams) on Friday whereas it closed flat in dollar term as it closed at $1,769 (per troy ounce). Similarly, silver futures declined 2.1 per cent ending the week at ₹68,366 (per kg) but in dollar terms as it closed flat at $25.92 (per troy ounce).

Considering that the US Federal Reserve is in no hurry to cut back on bond-buying or raise rates, weakness in the dollar could persist and this means the bullion could underperform for rupee investors.

MCX-Gold (₹46,737)

Facing a resistance band at ₹48,300 and ₹48,500, the domestic gold futures (June expiry) declined over the last few trading sessions. Importantly, the price is now below the support of ₹47,000. While this is not an alarming development, one should shy away from going long unless there are solid signals of the bulls regaining traction.

The shakiness shown by price action is also mirrored by other technical indicators. The daily relative strength index (RSI) which has been rising since the beginning of April, has now formed a lower low even though the price has not. Similarly, the moving average convergence divergence (MACD) indicator on the daily chart, though remains in the bullish zone, is turning its trajectory downwards. These are signs that traders should not ignore. As another indication for caution, the open interest for active gold futures contracts has gone up, though slightly, to 13,826 contracts from 13,766 contracts a week before. Open interest rising up with declining prices is a bearish signal.

Despite the above factors, one should wait until the support at ₹46,000 (where the 50-day moving average coincides) is breached to call it a bearish trend. Hence, traders can stay on the fence until a clear trend emerges. While a break below ₹46,000 can turn the trend in favour of the bears, if the contract regains traction and moves past ₹48,500 it could set the foundation for a medium-term uptrend. Supports below ₹46,000 are at ₹45,000 and ₹44,100; resistances above ₹48,500 are at ₹50,000 and ₹51,600.

MCX-Silver (₹68,366)

The silver futures (July expiry) had a muted opening and was trading in a tight range in the first two sessions of the week. However, the price declined in the subsequent days thereby ending the week with a loss of 2.1 per cent. But like gold futures, the silver futures too remain above a key support i.e. ₹67,000, and as long as the contract stays above this level, the decline cannot be counted as a trend reversal.

But the contract is exhibiting some signs of weakness. The daily RSI has now dropped to neutral region from bullish territory and the MACD on the daily chart suggests that the uptrend is losing momentum. The average directional index (ADX) shows that the bears are gaining ground against the bulls and if the support at ₹67,000 is taken out, the downward movement may accelerate. A drop in open interests can be seen which means the sell trend is not substantially strong. That is, the total open interest of the active contracts of silver reduced to 9,073 from 10,496 a week before.

Hence, one need not turn bearish until the support at ₹67,000 is breached. For the contract to re-establish its bullish trend it should decisively breach the prior high of ₹71,500. So, traders can remain on the sidelines until either of these levels are breached. New trades can be initiated depending on which level is broken first. Supports below ₹67,000 are at ₹65,000 and ₹63,450 whereas resistance levels above ₹71,500 are at ₹72,800 and ₹75,000.

Published on May 01, 2021

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