Derivatives

Is there light at the end of the tunnel for gold?

Akhil Nallamuthu BL Research Bureau | Updated on September 04, 2021

While the yellow metal futures stay within a range, silver sees a breakout

Over the past couple of weeks, there have been some improvements on gold fundamentals. The World Gold Council (WGC) report released earlier showed that imports into India improved considerably. Similarly, the latest statistics published by the WGC show that central banks added a net 30.1 tonnes in July this year. The gross purchases for the month stood at 34.3 tonnes, which is significantly lower than 63.1 tonnes in June. However, that was due to Brazil’s 41.8 tonnes purchase and the council says that the activity in July represents the return to the trend of modest buying. Also, buying in July a range of emerging market central banks. Brazil (8.5 tonnes) was the largest purchaser, followed by Uzbekistan (8.4 tonnes) and India (7.5 tonnes).

On the trading side, there was no significant improvement. The net long positions on the COMEX saw a marginal increase in August, showed the Commitment of Traders (COT) report by the Commodity Futures Trading Commission (CFTC). By the end of August, it stood at 631 tonnes compared to 628.8 tonnes in July.

Nevertheless, both precious metals made gains last week, most of which attained on Friday following weak US jobs data that pushed up the bullion prices. Gold gained 0.6 per cent to close at $1,826.6 per ounce, whereas silver appreciated by 2.9 per cent for the week as it ended at $24.69 per ounce. On the Multi Commodity Exchange (MCX), gold futures (October series) ended the week flat at ₹47,524 (per 10 grams) but silver futures (December expiry) on the MCX gained nearly 1.8 per cent and closed at ₹65,209 (per 1 kg) on Friday.

MCX-Gold (₹47,524)

It was the third straight week in which gold futures on the MCX charted a horizonal trend. The futures continue to stay within the consolidation range of ₹47,000 and ₹47,600. In other words, it has been oscillating in the space between 21- and 50-day moving averages (DMAs). So, unless either ₹47,000 or ₹47,600 is breached, the next leg of the short-term trend cannot be determined and the probability of the contract taking either direction is equal.

However, there are some positive indications from the indicators like the relative strength index (RSI) and the moving average convergence divergence (MACD) on the daily chart. While the former has entered the positive terrain, the latter is showing signs of a recovery.

But since ₹47,600 is a strong barrier, traders can wait for now and initiate fresh short-term long positions if futures go past this level. A breakout of ₹47,600 can take the contract to ₹48,000 and then possibly to ₹48,500. On the other hand, if the contract fails to crack ₹47,600 and drop below ₹47,000, it can decline to ₹46,650 and potentially to ₹45,660.

That said, investors eyeing long-term opportunities can accumulate gradually as the major trend is bullish and ₹45,000 is a very strong base.

MCX-Silver (₹65,209)

Although silver futures underperformed gold futures in the past three months, the trend over the past three weeks has been similar i.e., silver lacked direction and had been fluctuating within the price limits of ₹62,000 and ₹64,700.

However, on Friday the December futures of the silver broke out of ₹64,700 and closed at ₹65,209.

A comfortable weekly close above ₹64,700 means the contract have turned the near-term stance to bullish. But the cumulative open interest of all active futures contract declined to 8,307 as on Friday compared to 10,657 by the end of the preceding week. Yet, there are factors substantiating the bullishness. The price has rallied past 21-DMA and the daily RSI entered the bullish territory last week. Also, the MACD has been tracing an upward trajectory over the past couple of weeks and it shows good positive momentum being built up.

So, traders can consider buying December contract with stop-loss at ₹63,700. The price can rise to the resistance band of ₹66,800 and ₹67,000. The 50-DMA coincide at ₹67,000 making it a strong hurdle. If this resistance is taken out, price touching ₹69,000 will become a possibility. Supports from the current levels are at ₹64,700 and ₹63,700.

Digital gold

Tanishq, one of the leading jewellery brands in India, launched digital gold last week through SafeGold. This is not the first such product as digital gold is already on offer through digital platforms such as Paytm, Google Pay etc. There are advantages such as low minimum investment, ease of buying and selling and non-requirement of lockers etc. It is important to note that digital gold still operates in a regulatory vacuum and until regulations are in place, investors can opt for other vehicles like gold ETFs (exchange traded funds), which are operationally easy and regulated as well.

Published on September 04, 2021

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