Is gold headed for new lows?

Even as the dollar gave up its intraweek gains and ended flat, US treasury yields continue to extend their upside, weighing on the price of bullion. While silver managed to recoup some of its losses, essentially ending the week without a major change in price, gold was unable to recover and remained under pressure.

The yield on the 10-year US treasuries rose last week and it ended at 1.34 per cent versus the previous week’s close of 1.21 per cent. With this, the rate has seen an increase for three weeks in a row and notably, it touched one-year high of 1.363 per cent on Friday before softening a bit. The yields on the India 10-year government security have soared too. On Friday, it closed at 6.13 per cent compared to 5.99 per cent a week ago.

Rising yields may not bring much joy to gold investors as the recent leg of the gold rally, like that in other assets, has been driven by surplus liquidity and low yields resulting from continued stimulus. The asset reallocation from gold to bonds is a possibility as this does not really take away the safety factor from the investors. In fact, the interest income on bonds is an encouraging factor.

The price of gold futures on the Multi Commodity Exchange (MCX) went down by 2.4 per cent over the past week as it closed at ₹46,197 on Friday. However, silver futures showed some resilience and closed at ₹69,012, largely unchanged from last week but importantly outperforming gold. A similar trend can be observed in dollar terms as well. Gold depreciated by 2.2 per cent as it ended at $1,782.3 whereas silver prices stayed largely flat on a weekly basis as it wrapped up at $27.21 on Friday.

MCX-Gold (₹46,197)

Bears were quick to react even as the April futures contract of gold on MCX opened flat last week. The contract declined throughout the week and on Friday, it marked a fresh eight-month low of ₹45,861 before closing at ₹46,197. The price drop was accompanied by higher volumes and it has made a lower low on the daily chart. The price action since the beginning of 2021 shows that it has been forming lower highs and lower lows.

Affirming the negative bias, the relative strength index (RSI) and the moving average convergence divergence indicators on the daily time frame have run deep into their respective bearish territory. The average directional index (ADX) shows that the downswing has got good momentum.

So, going by the above indications, the futures could see further declines. Since ₹46,000 is a support, fresh short-term sell positions can be initiated below this level. The futures can gradually move down and touch ₹45,000 in the near-term. However, one should tighten their stop-loss. Recommended stop-loss is at ₹47,000.

The price has fallen to area where questions can be raised against the possibility of gold recovering and posting a gain for the current calendar year. We can continue to be inclined towards bullishness so long as the yellow metal trades above the price band of ₹44,700 and ₹45,000.

MCX-Silver (₹69,012)

Like gold futures, silver futures on the MCX too faced selling pressure, and as a result, the price has declined. But what differentiated silver from gold was that the former saw a good recovery on Friday after making an intraweek low of ₹67,530. Moreover, the dip in price until Friday was not strong as the volume has been diminishing. Unlike gold which looks weak, the short-term trend of silver continues to be horizontal and the contract is well within the consolidation range of ₹65,000 and ₹71,600. Taking the price action of the past couple of weeks, the trading range seem to have narrowed to ₹67,400 and ₹70,800.

Unless the contract breaches either the upper boundary or the lower boundary of the broader range mentioned above, the near-term trend will stay directionless. Supporting this view, the daily RSI is moving in the neutral region and the MACD on the daily charts remains flat. Also, the ADX has plunged to levels where the trend cannot be called neither bullish nor bearish.

That said, despite the near-term trend being sluggish, the major trend is up for silver and the futures price can touch ₹80,000 within next one year. From the current levels, on the upside, the contract can face obstacles at ₹71,600 and at around the prior high of ₹74,426. Within the bullion basket, traders and investors can prefer to go with silver because it appears to be more stable than gold.

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