Derivatives

Why gold could remain under pressure

Akhil Nallamuthu BL Research Bureau | Updated on June 26, 2021

Since there are some bearish indications, one can wait on the sidelines for now

Bullion prices have been under pressure in the past couple of weeks and this is reflected in COMEX net long positions. They have been declining in June after steadily increasing in May. According to the Commitment of Traders (COT) report released on Friday by the Commodity Futures Trading Commission (CFTC), net long positions in futures dropped to 656 tonnes by last week compared to about 731 tonnes at the beginning of the month. Thus, the speculators seem to be unwinding long positions as they do not see better prospects for gold. While this may not indicate long-term sentiment, prices are expected to be at lower levels in the short-term.

On the investment front, World Gold Council (WGC) data shows that the global assets under management (AUM) until the third week of June this year has seen an outflow of 136 tonnes bringing it down to about 3,626 tonnes. If prices remain lower for an extended period, more outflows can be expected which can further weigh on the price, creating a cascading effect.

Although the prices of bullion are below key averages, gold and silver closed almost flat last week. In the domestic market, gold futures (August expiry) on the Multi Commodity Exchange (MCX) closed at ₹46,925 (per 10 grams) on Friday compared to ₹46,728 a week before and the silver futures (September series) on the MCX ended at ₹68,950 (per Kg) on Friday as against ₹68,649 a week ago. In terms of the dollar too, gold and silver ended on a flat note at $1,780.3 and at $26.07 per ounce.

MCX-Gold (₹46,925)

Gold futures, which witnessed one of the biggest weekly declines a week ago stayed flat during the last week as there was no follow through action. August futures was held within ₹46,650 and ₹47,325 throughout the week. There was not much change in the outstanding open interest, showing a lack of activity. On Friday it stood at 14,384 contracts compared to 14,481 contracts a week ago.

Since the futures has already bounced off the price level of ₹46,850 in May and has not decisively breached it, the bears might be losing traction. At the same time, the price range of ₹47,325 and ₹47,500 is stopping the upwards movement by acting as a resistance band. There are certain indications that continue to hint at negative bias. The relative strength index (RSI) and the moving average convergence divergence (MACD) on the daily chart remain in their respective bearish zones and the average directional index (ADX) indicates that the bears are at an advantage over the bulls with better momentum comparatively.

Technically, as long as the contract trades in a range, the next swing in price will remain uncertain. But since there are some bearish indications and ₹46,650 being a support, one can wait on the sidelines for now and initiate fresh short positions with stop-loss at ₹47,750 if the support at ₹46,650 is breached. Those who are already holding short positions too can maintain the stop-loss at ₹47,750. Because a breakout of this level can turn the tide in favour of bulls. A break below ₹46,650 can trigger another round of sell-off which can drag the contract lower to ₹45,700, which is the nearest support. Subsequent support can be seen at ₹44,600.

MCX-Silver (₹68,950)

Like gold futures, silver futures too did not see an extension in decline and the contract (September expiry) was charting a rectangular pattern. Although it made an intraweek low of ₹67,717, the contract was stuck within the price range of ₹68,300 and ₹69,500 for most part of the week. Besides, the outstanding open interest of active futures contract saw a minor increase to 14,002 contracts from 13,914 contracts over the course of the past week. This along with a flattish price pattern shows that participants are unclear about the direction of the trend.

However, there are factors supporting a bearish inclination. One, the futures price continues to stay below the psychological level of ₹70,000. Two, the 21-day moving average has slipped below the 50-day moving average, a potential shift in the medium-term trend to the downside and three, indicators like the RSI and the MACD remains in their respective negative territories and the ADX shows that the bears have an upper hand over the bulls.

While the above signals favour sellers, one cannot neglect the support at ₹68,300. Hence, traders are recommended to short the contract if only it breaks below the support of ₹68,300. Stop-loss can be kept at ₹71,000. A breach of ₹68,300 can accelerate the down-move and can potentially drag it lower to ₹67,000, below which it can decline to ₹65,000 in the near-term.

Published on June 26, 2021

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