Derivatives

Is gold losing its shine?

| Updated on December 13, 2020 Published on December 12, 2020

The yellow metal has been underperforming silver in the recent past

Bouncing off its recent lows, the price of bullion in the domestic as well as global market rallied along with stocks last week and moved past some key levels, hinting at a potential resumption in rally. However, the price slipped towards the end of the week, raising doubts over its sustainability.

The latest data by the World Gold Council (WGC) shows that ETF fund flows, which was the force behind the rally in the past one year, paused with a net monthly outflow of 107.1 tonnes in November 2020. ETF outflows were seen across all regions and this is the second largest net outflow figure on record. This has significantly weighed on the price of the yellow metal.

The European Central Bank (ECB) on Thursday increased its asset purchasing programme, i.e., the pandemic emergency purchase programme (PEPP) by €500 billion, taking the total to €1,850 billion. But bullion prices gave a muted reaction to this announcement. Uncertainties surrounding a fresh round of stimulus by the US government and wrangling over Brexit continue to exist and these can significantly influence bullion on either direction in the coming days.

The spot price of gold on the Multi Commodity Exchange (MCX) rose to nearly ₹50,000 (per 10 grams) ,while the spot price of silver on MCX advanced to nearly ₹64,000 (per kg) mid-week. But gold and silver ended lower at ₹48,985 and ₹62,215, respectively, on Friday.

In dollar terms, gold wrapped up the week at $1,839.8, up by 3.7 per cent from its recent low of $1,773.9 and silver ended the week at $23.9, up by about 9 per cent from its latest low of $21.9, outperforming the yellow metal.

Notably, the major trend is bullish, and bullion prices continue to trade above levels that are crucial from the long-term trend perspective.

MCX-Gold (₹49,324)

The price of futures contract of gold expiring in February 2021 has been going up since the beginning of December. After registering a low of ₹47,551, the contract rebounded and crossed over the key level of ₹50,000. However, after marking a high of ₹50,175, the price declined and ended at ₹49,324 on Friday.

While the bulls are trying to fight it out, it is imperative that the price sustains above ₹50,000-mark to build a sustainable rally. Until then, the contract can face downward pressure in the near term. This is substantiated by the relative strength index (RSI) and the moving average convergence divergence (MACD) in the daily chart as they lie marginally in their respective negative territory.

As it stands, we can spot a lower high in the daily chart – a bearish indication. This price pattern will gain more significance if price falls from here, adding to the short-term bearishness. On the downside, ₹47,550 can act as a good base. A breach of this level can drag the contract towards the key support band of ₹45,800 and ₹46,000.

But remember, directionally, the overall trend is up and so, the futures price on MCX will most likely appreciate to ₹60,000 and possibly to ₹65,000 in two or three years. So, participants who can hold their trades for at least a couple of years can buy on declines.

MCX-Silver (₹63,735)

Like gold futures, the price of futures contract of silver expiring in March 2021 firmed up last week as the bulls attempted to revive their momentum. The contract, after marking its low of ₹58,880 in the final week of November, strengthened over the past couple of weeks. Last week, it closed at ₹63,735 after registering an intraweek high of ₹65,817.

Though the uptrend tackled the resistance at ₹65,000 briefly, the contract was unable to stay above the level and the price was driven lower towards the end of week. But unlike gold futures, where short-term price action is a bit bearish, silver futures is experiencing a consolidation phase, i.e., fluctuating between the psychological support at ₹60,000 and ₹66,000. RSI and MACD are flat.

While a range-trading strategy would be better until the contract moves within the ₹60,000 and ₹66,000 band, it will retain its bullish inclinations as long as the price is above ₹60,000. The contract has the potential to retest its lifetime high of ₹79,980 and can even touch ₹85,000 within next two to three years. Make sure that position sizing is within your risk tolerance so that you need not worry about the inevitable intermittent price volatility which can lead to temporary drawdowns. You should be particularly cautious in silver since it is more volatile than gold.

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Published on December 12, 2020
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