Derivatives

Which way gold will move this week?

Akhil Nallamuthu | Updated on January 23, 2021

Gold dropping below ₹48,600 can result in bears gaining an upper hand

The monetary policy announcements by the European Central Bank (ECB) and the Bank of Japan (BOJ) last week were in line with expectations. Both the central banks left interest rates unchanged and reaffirmed asset purchase programmes to drive their economies out of the slump. Thus, liquidity conditions will remain conducive for financial markets and bullion can be a beneficiary too as has been the case since March last year.

Early last week, data released by China showed that their gross domestic product (GDP) grew by 2.3 per cent in 2020, thereby making it the only major economy to post growth this year. In the December quarter, growth stood at 6.5 per cent. Should the Chinese economy gain traction, this can improve demand for bullion as China is one of the largest consumers.

As the above developments unfolded, gold and silver prices have been gaining gradually over the week. The price of gold futures contract on the Multi Commodity Exchange (MCX) went up by nearly 1 per cent last week as it closed at ₹49,140 (per 10 grams) on Friday. Similarly, silver futures appreciated by 2.9 per cent and ended at ₹66,642 (per kg).

In terms of dollar, gold wrapped up last week at $1,852.5 (per ounce), gaining 1.4 per cent whereas silver closed at $25.4 (per ounce), up by 2.7 per cent. The gains were marginal, and the short-term sluggishness is likely to stay.

MCX-Gold (₹49,140)

After a flat opening last week at ₹48,699, the February futures contract of gold on the MCX moved upwards. However, after hitting a weekly high of ₹49,765, the contract reversed direction and fell. Consequently, the futures closed the week almost flat and price action in the past couple of weeks clearly shows a lack of momentum in either direction.

But a near-term bearish bias cannot be denied as the contract is unable to cross over the ₹50,000-mark and the price continues to trade below both 21- and 50-day moving averages (DMAs). Moreover, indicators like the relative strength index (RSI) and the moving average convergence divergence (MACD), though have been flat for the past two weeks, are marginally in the negative territory.

The above factors make us believe that the bears can have an influence on the futures in the near-term. A drop in price below the support at ₹48,600 can result in bears gaining an upper hand, which can lead to the contract dropping towards the support band of ₹48,000 and ₹47,550. Since ₹47,550 is a key support from the long-term trend perspective, a breach of this level can put the uptrend under trouble.

But until the contract stays above the support band, long-term traders and investors can relax as the likelihood of the price reaching ₹56,000 within a year will not be diminished.

MCX-Silver (₹66,642)

The price pattern of the silver futures over the past week looks akin to gold futures. That is, the March futures contract of silver began the week flat at ₹65,055 on Monday and then it started to appreciate.

But soon after marking a high of ₹67,848 on Thursday, the contract turned around and started to head southwards. As a result, the contract ended at ₹66,724, settling for a gain of nearly 3 per cent.

While the daily RSI is lingering in the neutral region, the MACD indicator on the daily chart has been descending downwards, hinting at bulls losing traction. Also, the price lies below the vital resistance of ₹68,000 and the 21-DMA.

But silver futures seem to have outperformed gold futures, i.e., the former is now up by nearly 4.8 per cent whereas the latter is up by 1.2 per cent, from their respective recent lows. Also, the daily chart shows that the price has been charting a rising channel, signaling silver has better prospect at least in the short run.

Looking at the downside from current levels, ₹63,000 can be a good support. Though a breach of this level can pull the contract down towards the psychological support of ₹60,000, the major bull trend is still intact. Therefore, silver futures can potentially rally to ₹75,000 in a year, and in the subsequent year or two it can touch ₹80,000 and even ₹85,000.

Published on January 23, 2021

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