Derivatives

Will silver outperform gold?

Akhil Nallamuthu | Updated on January 30, 2021

Investors can consider buying silver futures which is projected to touch ₹75,000 in short term

A couple of important data points came out last week which are expected to have an impact on bullion prices. The World Gold Council (WGC) released its full year demand and supply statistics for gold and Bureau of Economic Analysis (BEA) in the US came out with GDP (Gross Domestic Product) growth numbers.

According to WGC data, demand for gold in the fourth quarter of 2020 dropped by a significant 28 per cent to 783.4 tonnes compared to corresponding quarter in 2019 when it stood at 1,082.9 tonnes. The drop in yearly demand was largely due to outflows from ETFs (exchange-traded funds) and reduction in jewellery demand as gold prices remained at elevated levels. This has pulled down the total demand for the whole of 2020 by 14 per cent to 3,759.6 tonnes from 4,386.4 tonnes in 2019.

The US economy contracted by 3.5 per cent in 2020 compared to a growth of 2.2 per cent in 2019, as per the BEA release. In the fourth quarter of last year, the growth stood at 4 per cent, compared to 33.4 per cent growth in the third quarter. Nevertheless, the dollar managed to hold up and the dollar index ended last week marginally higher at 90.58. A further gain in the dollar can exert downward pressure on bullion prices.

Gold prices stayed flat for the week on a close-to-close basis but silver rallied. On Multi Commodity Exchange (MCX), gold futures ended the week flat at ₹49,337 (per 10 grams) and silver futures wrapped up the week at ₹69,706 (per 1 Kg), gaining 4.6 per cent.

Now, there are talks that the reddit traders, who blew up short sellers in the stock of GameStop, are hitting silver with a similar notion. Though silver can be too big when compared to a stock, there can be some reaction in silver if not at the magnitude of GameStop. So, one should be wary of abrupt price changes.

MCX-Gold (₹49,337)

Though the weekly close appears flat for gold futures, there was enough volatility intraweek, induced by the dollar. At a broader level, the April futures contract of gold is held in the price band of ₹48,600 to ₹49,750. While the ₹48,600 level has been preventing the contract from falling since early December last year, ₹49,750 is a considerable resistance where both 21- and 50-day moving averages (DMA) coincide, which implies these levels might not give in easily. It may not be an easy task for the gold futures to break out of this range.

Even if the relative strength index (RSI) and the moving average convergence divergence (MACD) indicators on the daily chart stay in the bearish zone, the course of short-term trend will continue to be uncertain. The direction of the break may provide us with clues. Taking the above factors into account, participants looking for quick trades should be cautious. A range trading strategy may be more suitable as long the contract trades between ₹48,600 and ₹49,750.

Irrespective of above factors, the major trend is still looking upwards and traders/investors with a time horizon of one year and above can go in with fresh longs since the contract can potentially touch ₹56,000 in a year. Beyond that it can rise to ₹60,000. En route upwards, it can face a roadblock at ₹52,000, which eventually is expected to be invalidated. The long-term uptrend will not be altered until the price stays above ₹47,650.

MCX-Silver (₹69,706)

After opening on a flat note, the March futures contract of silver was trading on a sober note for most part of the week. But then on Thursday, it witnessed sudden buying resulting in the price crossing over a key hurdle at ₹68,000. Though the futures retraced below that level by the end of that session, it broke out of the price point on Friday after bouncing off its 50-DMA support at around ₹65,800. Consequently, the RSI and the MACD indicators on the daily chart have climbed into the respective bullish territory. The average directional index (ADX) indicates that the rally is gaining strength. Thus the outlook has turned positive for silver.

Although the contract has its immediate resistance at ₹71,600, its movement suggests that a breakout is highly likely. So, traders and investors can consider buying silver futures. In the short run, a rally towards ₹75,000 is projected and over the next year or so it can possibly appreciate to ₹80,000 and even ₹85,000. So long as the price stays above ₹60,000, the overall uptrend will remain intact.

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Published on January 30, 2021
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