Derivatives

Trend for precious metals remains directionless

Akhil Nallamuthu | | Updated on: Jan 08, 2022
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Despite a fall, gold and silver are now above their respective supports

The World Gold Council (WGC) came up with the latest monthly central bank statistics on gold which shows that the central banks offloaded 21.5 tonnes of gold in November – the first monthly decline since January 2021. But despite the net sales in November, central banks are on course of being net buyers in 2021, according to WGC.

While the full year gold demand trend in 2021 is expected to be published by the WGC at the end of this month, the data on the gold backed ETFs (exchange traded funds) was released last week.

In 2021, global ETFs saw net outflow of about 173 tonnes as risk-on sentiment dominated the markets. The ETFs have seen net outflows for the first time in the last six years. The inflows seen in Europe and Asia were not enough to compensate the North american outflows. But notably, the gold ETF holdings are significantly above the pre-pandemic levels as 2020 saw a record inflow of 875 tonnes.

On the trading front, the bullion saw its price depreciate during the first week of this year. In terms of dollar, gold and silver lost 1.1 and 3.3 per cent as they closed at $1,795.6 and $22.3 per ounce, respectively. On the Multi Commodity Exchange (MCX), gold futures lost 1.3 per cent as it ended at ₹47,452 (per 10 grams), whereas silver futures was down by 3.3 per cent by closing the week at ₹60,607 (per kg).

While that was with respect to the price movements, on the regulations front, market regulator SEBI (Securities and Exchange Board of India) has come up with rules for vault managers. This follows SEBI’s proposal in September for setting up a gold exchange where gold will be traded in the form of Electronic Gold Receipts (EGRs), and this will be treated like any other financial security.

The regulations lay down the obligations for vault managers and the rules for depositing and withdrawal of gold. If someone intends to deposit gold with the vault manager, they will have to make it through an accredited refinery or a nominated agency. Vault managers or their authorised persons will create and issue EGRs in the name of the depositor against their deposit. When the beneficial owner of EGRs seeks to withdraw gold, they shall place a request with the depository and the depository shall intimate the withdrawal approval to the concerned vault manager. Post withdrawal, the vault manager will extinguish the EGRs and intimate the same to the depository. With the new regulations, we are one step closer in creating a strong gold ecosystem in India and this will lead to domestic price discovery.

MCX-Gold (₹47,452)

The February futures of gold on the MCX was trading with a bearish bias all through the week and posted a weekly loss of 1.3 per cent. However, the contract remains within the price range of ₹47,400-48,550, within which it has been oscillating for more than a month. Although, it briefly crossed over ₹48,550 to mark a high of ₹48,785 in mid-December.

Even though the price action and the indicators like the relative strength index (RSI) and the moving average convergence divergence (MACD) are showing some weakness, the futures should move out of this range to provide some clarity with respect to the next leg of trend. Following a rally above ₹48,550 three weeks ago, we had recommended to go long at around ₹48,600 with initial stop-loss at ₹47,600. But a couple of weeks back, we advised to tighten the stop-loss to ₹47,250. Traders who have this position can continue to hold for the coming week. Traders considering fresh bets can wait for some more clarity on the price action before pulling the trigger on either side.

In case if the contract breaks out of ₹48,550, it can appreciate to the immediate resistance at ₹50,000 in the near-term. Subsequent resistance is at ₹52,500. But if the contract breaks below ₹47,400, the short-term trend can turn bearish wherein the price could drop to ₹46,500 and could even decline to ₹45,920.

MCX-Silver (₹60,607)

Silver futures (March expiry), which was consistently testing the crucial resistance at ₹62,500 for the past three weeks, showed some bullish bias. So, we suggested to consider longs once ₹62,500 is breached. But last week, the contract saw a considerable fall of 3.3 per cent, shattering the hope of the bulls.

Yet, the contract remains above the critical support level of ₹60,000. As such the trend has not turned negative yet. However, the futures contract should rally past ₹62,500 to establish a sustainable rally.

So, unless the contract sees a daily close above ₹62,500 or a daily close below ₹60,000, there will be no clarity on the next swing in price. The contract fluctuating within these price levels in the short-term is also a possibility. Therefore, participants are advised not to take fresh trades and wait for silver futures to move out of this range.

From the current levels, resistance can be seen at ₹61,300 and ₹62,500; while the supports are at ₹60,000 and ₹57,800.

Published on January 08, 2022

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