Derivatives

Silver can shine more than gold

Akhil Nallamuthu BL Research Bureau | Updated on July 03, 2021

Silver sees positive undertone and fresh longs can be initiated if the support at ₹70,000 sustains

Continuing the recent trend, net purchases of gold by central banks was seen in May. It stood at 56.7 tonnes according to the data released by the World Gold Council (WGC). This is 11 per cent lower month on month but a significant 43 per cent higher compared to the monthly average for 2021. The buying has been stable this year contrasting with inconsistent transactions in 2020. Central banks buy gold irrespective of the price as it plays a key part in their reserve management. While the buying has been steady, it should be noted that the buying tends to be by a few central banks, this time around the driver being the Bank of Thailand.

Another data set from the WGC shows that the costs of the gold mining industry increased in the second consecutive quarter this calendar year with the global average All-in Sustaining Cost (AISC) going up by 5 per cent to $1,048 per ounce, the highest since second quarter of 2013. While a part of this can be attributed to seasonal factors, other factors such as the cost related to Covid - PPE kits, carrying out testing and quarantine procedures and rising labour costs added to the overall cost. The costs are expected to remain at elevated levels for the rest of the year and this can put upward pressure on the gold price.

On the price front, both gold and silver ended the week flat as they closed at $1,787.3 and $26.44 (per ounce), respectively on Friday. But since rupee depreciated against the greenback, bullion performed better in the domestic market. Gold futures (August expiry) on the Multi Commodity Exchange (MCX) closed the week with a marginal gain of 0.8 per cent as it ended at ₹47,285 (per 10 grams) and silver futures (September expiry) posted a gain of 1.8 per cent by closing at ₹70,188 (per Kg) on Friday.

MCX-Gold (₹47,285)

Gold futures (August series), trading in the range between ₹46,650 and ₹47,325, breached the lower boundary last week and hit a fresh low of ₹46,330. Had the contract sustained at those levels, the bears could have made an onslaught on the bulls. However, the bulls were quick enough to respond and pushed the contract back above the support of ₹46,650 in the very next session. The rally continued in the ensuing sessions and consequently, the contract made an intraweek high of ₹47,515 before closing lower at ₹47,285. Thus, there is no clear breakout of the resistance of ₹47,325.

Nevertheless, indicators like the relative strength index (RSI) and the moving average convergence divergence (MACD), though lying in the negative zone, are showing signs of the uptrend picking up momentum. While the RSI is showing a fresh uptick, the MACD is turning its trajectory upwards. The number of outstanding open interest (OI) of all active futures contract increased to 14,806 contracts on Friday as against 14,384 contracts, a week before – a price increase accompanied by increase in OI is a bullish signal.

Since the contract is yet to decisively close above the resistance of ₹47,325, traders can wait for the same before initiating fresh long positions. Once the breakout occurs, the price is likely to rise to ₹48,140 – its 50-day moving average – next week, a breakout of which can take the contract to the critical resistance at ₹48,600 where 200-DMA coincide. But in case if the futures sustains below ₹47,325 next week, it can retest the low of ₹46,330.

MCX-Silver (₹70,188)

Similar to gold futures, silver futures (September expiry) declined in the first half of the week and then recovered swiftly. But unlike gold, it did not make a fresh low but bounced off the prior low of ₹67,700, which is acting as a good support. The silver futures registered a higher high of ₹70,360 before wrapping the week at ₹70,188 i.e., above the important level of ₹70,000. However, it has only closed marginally above ₹70,000 and so, to call it a decisive breakout, the futures should sustain above that level.

Though the RSI and the MACD are showing fresh positive signs, there is notable decline in activity in the contract even as it saw movement on either direction last week. The number of outstanding OI of all active futures contracts witnessed a considerable drop to 9,689 contracts from 14,002 contracts, a week before.

Considering the above factors, traders can stay away from initiating fresh trades even though there are certain bullish indications. Start fresh longs only if the contract sustains above an important hurdle at ₹70,000. The immediate resistance from the current level is at ₹71,600 – its 50-DMA. Above that level it can rally towards ₹72,500. If the contract falls back below the resistance at ₹70,000, it can be expected to retest ₹67,700.

Published on July 03, 2021

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