Derivatives

Why gold, silver are poised to rise more

Akhil Nallamuthu BL Research Bureau | Updated on April 17, 2021

Technicals show both precious metals showing bullish signs after second straight week of gains

Despite India being one of the top gold consumers in the world, its bullion market has for long been quite loosely regulated. The government mandating the hallmarking of gold jewellery and artefacts by the sellers from June 1 2021, is a key step to change this and to apply a higher quality bar. It was originally planned to implement this from January 15, 2021 but was postponed due to the pandemic.

While gold contracts traded on Multi Commodity Exchange (MCX) are of 995 purity level i.e., 99.5 per cent gold, gold purchased in the physical market from jewellers was not always standardised. But this is set to change as new rules become effective. This can potentially prevent monetary loss to the consumers because under the new rules there is no room for under-caratage. According to a PTI report, only 40 per cent of the jewellery sold in India is hallmarked currently.

From a traders’ perspective, both gold and silver extended their gains for the second consecutive week as the dollar continued to slide as well. The price change in rupee terms reflected the trend in global markets as the exchange rate was flat despite considerable volatility during the week. In dollar terms, gold closed the week at $1,776.3 per ounce versus preceding week’s close of $1,743.1 and silver ended at $25.95 per ounce compared to $25.24 – its previous week’s close. In rupee terms, gold futures (June expiry) on the Multi Commodity Exchange (MCX) gained 1.6 per cent as it closed at ₹47,353 (per 10 grams) against the previous week’s close of ₹46,593 whereas silver futures (May expiry) posted a gain of 2.5 per cent and ended at ₹68,684 (per kg) compared to the preceding week’s close of ₹66,983.

MCX-Gold (₹47,353)

The price of the June futures contract of gold on the MCX inched up over the past week and marked fresh highs. The futures contract has closed the week above the key level of ₹47,000 thus closing in the green for third consecutive week, signalling the upward momentum is strong.

Reflecting the positivity in the price action, technical indicators too are showing bullish signs. The daily relative strength index (RSI) has been steadily gaining over the past couple of weeks and the moving average convergence divergence (MACD) indicator has now entered the positive territory.

Moreover, gold futures has now moved above the 50 per cent Fibonacci retracement level of the prior downswing and also above both 21- and 50-day moving averages (DMAs). However, there is one factor that calls for caution i.e., the open interest (OI) of futures on the MCX for the June contract, though not significant, has dropped from 11,894 to 11,363 contracts over the past week. However, the OI for the August futures has increased along with the price, supporting the near-term bullish outlook.

Traders and investors can buy at current levels. The immediate hurdles from the current levels can be spotted at ₹48,300 above which there is the resistance band of ₹49,800 and ₹50,000. A breach of ₹50,000 can attract more fresh long positions and this can be considered as a strong hint that the gold has reverted to its long-term bullish trend.

MCX-Silver (₹68,684)

The up-move in the silver futures was sharper in comparison, as it posted gain in four out of five sessions in the past week. Consequently, the price has now travelled above both 21- and 50-DMAs, nullifying important resistance at ₹68,000. The contract has formed a higher high and this provides room for optimism.

Substantiating the positive inclination, the RSI and the MACD have been consistently moving northwards and staying in their respective bullish zones. The average directional index also shows that the uptrend is gaining traction. As far as the OI of silver futures is concerned, the change is similar to that of gold futures. That is, the OI of the nearest expiry (May) has come down to 8,843 from 9,415 a week ago whereas the subsequent expiry (July) has seen an increase in OI from 834 to 1,224. Hence, the bullish outlook can be retained.

Traders and investors can consider going long as the trend remains positive for silver. The futures will most probably cross the psychological level of ₹70,000 and touch the crucial resistance at ₹71,850. If the metal can maintain the positive momentum, the futures could breach ₹71,850 where it might be pushed towards ₹75,000. Henceforth, the range of ₹67,000 and ₹68,000 will be a critical base for the contract.

Published on April 17, 2021

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