Derivatives

Why gold is not out of the woods yet

Akhil Nallamuthu BL Research Bureau | Updated on August 14, 2021

Its futures contract is trading below key level even though it has rebounded from 4-month lows

Gold, which looked set to see a decline, recovered mid-week following a US dollar weakness triggered by the latest US inflation print. Consumer price inflation stood unchanged at 5.4 per cent in July, supporting the view that higher inflation could be transitory. This dragged the dollar, and the yellow metal was a beneficiary as it reversed its trend for the rest of the week. However, silver failed to bounce back, and ended the week on the back foot as it underperformed the yellow metal.

Because of the mid-week recovery, gold managed to end the week with a gain of 1 per cent as it closed at $1,779.15 per ounce compared to the preceding week’s close of $1,762.70. On the Multi Commodity Exchange (MCX), the October expiry gold futures closed with a marginal gain, wrapping up the week at ₹46,940 (per 10 grams) on Friday as against the preceding Friday’s close of ₹46,640. But silver took the backseat as it lost 2.4 per cent last week by closing at $23.74 per ounce. Also, the September futures of silver on the MCX lost 2.7 per cent as it ended at ₹63,238 (per 1 Kg) on Friday.

ETF outflows

As per the latest AMFI (Association of Mutual Funds in India) data, gold ETFs in India saw outflows for the first time in the last eight months. The net outflow in July stood at ₹61.5 crore, as investors seem to have started losing patience with the yellow metal. It’s year-to-date (YTD) return is negative when compared to equities, which continues to rally.

The YTD loss of gold futures is about 6.5 per cent whereas the Nifty 50 has returned a little over 18 per cent. However, net assets under management (AUM) increased by 3.2 per cent to ₹16,750 crore in July as gold prices gained about 2.2 per cent.

MCX-Gold (₹46,940)

Gold futures, after beginning last week with a gap-down, extended the decline and marked a fresh four-month low of ₹45,662 on Tuesday. However, after hitting this low, the futures reversed the trend upwards which resulted in neutralising the loss for the week i.e., on weekly basis, there was not much change in price. But the recovery may not turn into a bullish reversal as long as the price remains below the key level of ₹47,000.

Reflecting the bearish inclination, the relative strength index (RSI) and the moving average convergence divergence (MACD) on both daily and weekly charts, continues to be in the negative territory. The price is below important moving averages i.e., the 21-day moving average (DMA) and 50-DMA. Also, the average directional index (ADX) shows that bears are in dominant position despite the recovery in the latter half of last week.

Besides, there is a drop in net long positions on the COMEX according to the latest Commitment of Traders (COT) report released by Commodity Futures Trading Commission (CFTC). That is, it has dropped to 527.7 tonnes as on August 10th compared to 635.5 tonnes a week before.

Given the above factors, one can retain the bearish outlook until prices stay below ₹47,000 and can make use of intermittent rallies to go short in the futures. Traders can short October futures on rallies with stop-loss at ₹47,800. On the downside, the contract is most likely to retest ₹45,662. A breach of this level can drag it to ₹45,000. But in the event of futures moving beyond ₹47,000, it can touch ₹47,500, a resistance level where the 21-DMA coincides.

MCX-Silver (₹63,238)

The breach of the support of ₹65,000 during the week before induced considerable downward momentum to silver futures. It could not replicate the bullish reversal that gold futures exhibited and produced negative return of 2.7 per cent last week. The futures registered a fresh eight-month low of ₹61,536 before recovering a bit and ending the session at ₹63,238.

The bearish bias is corroborated by the RSI and the MACD as both the indicators remain in the negative region in both daily and weekly charts and the ADX on the weekly chart is hinting at bears gaining fresh traction. Besides, the contract has been consistently making lower lows and lower highs as seen on the daily chart, showing that the momentum is in the favour of sellers.

Considering the above factors, traders are recommended to initiate fresh short positions in the September futures on rallies. Stop-loss can be maintained at ₹65,000. The nearest support for the contract is at ₹60,000, a psychological level. A breach of this level can pull the contract down to ₹59,000. While the outlook will be negative until the price stays below the resistance band of ₹65,000 and ₹65,700, a break beyond this level can lift the contract to ₹67,700.

Published on August 14, 2021

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