Derivatives

Long-term trend for gold is bullish

Akhil Nallamuthu | Updated on December 05, 2020 Published on December 05, 2020

While safe-haven demand wanes, other factors can prop up the yellow metal

Fresh hopes of a coronavirus vaccine that emerged during the first week of November dragged down the prices of bullion as a safe-haven choice in recent times.Prices had already witnessed considerable correction from their peak by then.

As on Friday, the spot price of gold on the Multi Commodity Exchange (MCX) had dropped to ₹49,285 (per 10 grams) from its peak of ₹56,018 registered in early August, down by 12 per cent. Similarly, the spot price of silver had declined to ₹63,080 (per Kg) from its peak of ₹73,755 made in August, down by nearly 15 per cent.

In dollar terms, the price of gold is $1,839, 11 per cent below its all-time high of $2,075 (per troy ounce), while the price of silver is $24.2, a discount of 19 per cent from its life-high of $29.8.

What weighed on the prices of precious metals was the risk-on sentiment that followed the announcement of significant progress in the Covid vaccine by Pfizer. After the news, the stock market rally has acquired new legs while the correction in gold and silver prices has deepened. Precious metals fell despite the dollar remaining weak.

Vaccine hopes apart, other data points too weighed on the gold price. There has been a considerable fall in ETF inflows during the past few months. Global gold ETF demand was down to a little over 20 tonnes in October compared to about 165 tonnes in July. Net long positions of money managers on the COMEX have also dropped to 748 tonnes in October from 900 tonnes in July, according to the World Gold Council (WGC) data.

Hopes of a quicker rebound from world economies on positive high frequency indicators like Purchasing Managers Index (PMI), employment data etc. also fuelled optimism among investors and dimmed the allure of gold.

While gold’s appeal as a safe haven may be waning, other drivers can come into play to support bullion. Higher inflation expectations that ordinarily fuel gold, the weakening dollar and the logistical challenges surrounding the distribution of the vaccine appear to be the factors that could support bullion.

 

MCX-Gold

After hitting a peak of ₹57,100 in the first week of August, the futures contract of gold on MCX expiring in February 2021 has been on a decline. Though the contract initially took support at the psychological level of ₹50,000, it broke below this level in the first week of November, turning the short-term outlook negative for the yellow metal. It then marked a low of ₹47,551 last week. The price has since recovered a little and closed at ₹49,172 on Friday.

Because of the recent fall, the 21-day moving average (DMA) has crossed below the 50-DMA, a bearish indication. Also, the relative strength index (RSI) and the moving average convergence divergence (MACD) indicators on the daily chart have slipped into bearish territory.

Considering the above factors, the price can be under pressure in the short-term. Further correction can drag the futures price towards a key support band of ₹45,800 and ₹46,000. However, these price levels will most likely see the decline arrested. Nevertheless, the secular trend is bullish and, therefore, investors with a longer time horizon can accumulate bullion on declines. On the upside, the price can top ₹60,000 and can even touch ₹65,000 in two to three years down the line.

MCX-Silver

Mirroring gold futures, the price of silver futures expiring in March 2021 on MCX registered a fresh high of ₹79,980 in early August. What followed was a moderation wherein the futures dipped below the key support of ₹70,000 in late September and have been since in a sideways crawl. Though there was an attempt to establish an uptrend, the contract was unable to rally and witnessed another round of sell-off since early November. As a result, the price declined and registered a low of ₹58,880 last week from where the price rebounded and closed at ₹63,813 on Friday.

The rebound has been stronger in silver compared to gold. The silver futures contract is up by about 7 per cent from its low whereas gold futures is up by about 2 per cent. As silver futures contract has largely managed to remain above the support of ₹60,000, the corrective decline looks weaker than in gold. This could be on account of silver donning two hats -- one as a safe haven cousin of gold and another as a metal that has industrial applications and can benefit from industrial revival.

The RSI and the MACD indicators on the daily chart are showing a fresh uptick following the latest rebound. Both indicators have now moved to neutral region from the bearish zone, showing that the bears are losing traction. So, going forward, the futures contract is not very likely to decline below the prior low of ₹58,880. Since the overall trend remains positive, the price can potentially test ₹80,000 and even touch ₹85,000 in the long run.

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Published on December 05, 2020
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