Derivatives

Why gold bulls and bears are at loggerheads

Akhil Nallamuthu BL Research Bureau | Updated on September 11, 2021

Traders can stay on the fence till the silver contract makes a decisive breach

Gold might see some positive activity in September as per the World Gold Council’s latest monthly commentary released last week. This is likely to be driven by a couple of factors. Strong demand linked to Indian wedding season and higher global investment activity following a quiet summer. This can drive up the demand for the precious metal, boosting prices.

The WGC’s gold ETF (exchange traded fund) data however show that global ETFs saw net outflow of 22.4 tonnes in August, the first such occasion in the last four months.

Outflows in North America funds outpaced inflows in European and Asian funds, largely due to dollar strength during the early part of the month. AMFI (Association of Mutual Funds in India) data show that gold ETFs in the country witnessed a net inflow of ₹24 crore in August, with net AUM at the end of the month at about ₹16,350 crore. In July, ETFs saw a net outflow of ₹61.5 crore.

With regards to price, both gold and silver produced negative weekly returns. While gold lost 2.1 per cent and closed at $1,787.3 per ounce on Friday, silver lost 3.9 per cent and ended the week at $23.72 per ounce. On the Multi Commodity Exchange (MCX), gold was down by 1.5 per cent and closed at ₹46,806 (per 10 grams). Silver depreciated by 2.5 per cent as it ended Friday’s session at ₹63,592 (per 1 kg).

MCX-Gold (₹46,806)

Even as the gold futures (October series) contract has been moving within a sideways band, it had been showing some signs of recovery before last week.

The candlesticks formed during the recent weeks were with longer wicks at the bottom showing that there was good buying happening at around ₹47,000.

However, last week, the futures declined and slipped below the important level of ₹47,000, closing at ₹46,806.

The immediate support is ₹46,650. From the perspective of short-term trend this is a key level for the bulls because a breach of this will turn the outlook bearish.

Substantiating the bearish inclination, the relative strength index (RSI) is now below the mid-point level 50 and the moving average convergence divergence (MACD) is turning its trajectory towards south.

The average directional index (ADX) which shows the strength of the trend, is indicating that bears are better positioned to exert influence on the contract than bulls.

The number of outstanding open interest (OI) of all active futures of gold on the MCX stood at 15,240 on Friday, increasing from 14,440 a week before. A fall in price along with an increase in OI is a bearish signal.

The above factors show there is weakness building in gold futures. The probability of a decline seems high.

But since ₹46,650 can offer some support, traders can wait and short the contract if it invalidates the support. Below ₹46,650, the futures is likely to drop to ₹45,662 – its previous low.

Subsequent support is at ₹45,000, a critical level from the perspective of medium and long-term trends. But if the contract bounces off the support at ₹46,650, it can cross over ₹47,000 and can possibly touch ₹47,500.

MCX-Silver (₹63,592)

Following the breakout of ₹64,700 in the week before, the silver December contract looked set to rally further as there was a potential shift in the near-term trend to upside. But the contract made a U-turn last week as bears were quick to respond, dragging it below ₹64,600 and closing the week at ₹63,592. Thus, the contract has made yet another lower high and the price is now slightly below 21-day moving average (DMA), which are bearish cues.

While the MACD is still tracing an upward trajectory, it remains in the bearish region and the daily RSI entered negative territory last week. Besides, like in gold futures, the number of outstanding OI of all active silver futures went up and was at 10,918 as on Friday as against 8,307 by the end of the preceding week. Although these factors show the possibility of downward movement continuing, there is a support at ₹62,000. This is the lower end of the price range within which it has been fluctuating until the breakout. Similarly, the upper limit of ₹64,700 is likely to resist the rally.

Given the prevailing trend, traders can stay on the fence and wait for the contract to decisively breach either ₹62,000 or ₹64,700 before punching in fresh trades. A solid breakout of ₹64,700 can lift the contract to ₹65,600 and potentially towards ₹66,800. On the other hand, if the contract descends below ₹62,000, the sell-off can accelerate pulling the contract down to ₹60,000 – a crucial base.

Published on September 11, 2021

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