Derivatives

Why gold, silver are set to shine

Akhil Nallamuthu BL Research Bureau | Updated on October 09, 2021

Bullion has started October on the front foot after remaining weak last month

Investors seem to be scaling down their gold exposure as overall fund flows into gold exchange traded funds (ETFs) remained negative in September, a second consecutive month of outflows. The data by the World Gold Council (WGC) shows that net outflows from ETFs stood at 15.2 tonnes following net outflows of 22.4 tonnes in July. The loss in interest can be attributed to the performance of gold as it lost about 4 per cent last month. According to WGC, higher US yields were a major driver in gold weakness, with the dollar strength also impacting to some extent. That said, investors in India seem to be capitalising on lower gold prices as domestic gold ETFs have seen an inflow of ₹446 crore in September.

The central bank’s buying of the yellow metal saw a slowdown in August, latest WGC data shows. Net central bank purchases in August were at 28.4 tonnes, the second lowest level of net monthly purchases so far this year. Thus, at the broader level, September remained a bad month for gold.

On the trading front, bullion closed flat in terms of dollar – gold closed at $1,756.7 versus previous close of $1,760.4 whereas silver ended at $22.66 as against the prior week’s close of $22.52. But on the Multi Commodity Exchange (MCX), gold futures (October expiry) appreciated 1.1 per cent for the week as it ended at ₹47,037 (per 10 grams) while silver went up 2.1 per cent and closed at ₹61,801 (per 1 kg).

MCX-Gold (₹47,037)

After remaining choppy since mid-September, gold futures on the MCX seem to be attracting the attention of the bulls as they rallied last week gaining 1.1 per cent. While there are hurdles ahead, bulls are clearly at an advantage and therefore more gains, at least in the short-term, can be expected.

The rally last week has resulted in the contract closing above the range of ₹46,000 and ₹47,000, creating a positive undertone. Supporting the same, the relative strength index (RSI) is now showing an uptick and has moved into the positive terrain and the moving average convergence divergence (MACD) is charting an upward trajectory and is on the verge of entering the territory of bulls. The average directional index (ADX) is suggesting that the bulls have an edge over the bears. The price is now above the 21- and the falling trendline; it is now testing the 50-day moving average as well. Besides, the outstanding open interest (OI) of all active futures of gold on the MCX has gone up to 14,615 as on Friday compared to 13,908 contracts a week ago.

Against this backdrop, the gold futures contract is expected to continue the rally and rise past the immediate resistances at ₹47,800 and ₹48,000 and touch ₹48,300. A breach of this level can lift the contract to ₹49,000 in the short run. Hence, traders can go long and place stop-loss at ₹46,600. As long as the price stays above 21-DMA, which now lies at ₹46,200, the short-term trend will remain positive. But if the contract loses traction and slips below 21-DMA, the possibility of the contract touching ₹46,000 can go up significantly.

MCX-Silver (₹61,801)

While the silver futures (December) contract was flat for most part of last week, it gained on Friday to close the week on positive note, opening the door for further strengthening. Thus, the bounce from ₹58,150 in the week before last week gathered further momentum and this is likely to turn the short-term trend bullish.

Affirming the positivity, the contract has gone past the 21-DMA and the 23.6 per cent Fibonacci retracement level at ₹62,000. Like in gold futures, the RSI and the MACD on the daily chart are showing bullish signals. Besides, the contract is now testing the falling trendline that connects prior highs, and the price action indicates that the rally has the potential to take the contract further up in the upcoming sessions.

Immediate resistance can be spotted at ₹63,000 where the 50-DMA coincides. Taking this into consideration, although there are positive indications, traders can wait for now and initiate fresh long positions once ₹63,000 is decisively breached. Stop-loss can be placed at ₹61,000. Once ₹63,000 is breached, the contract can be expected to touch ₹65,600 with a minor pause at ₹64,300. A breach of ₹65,600 can open up the possibility of the futures price rising to ₹67,700.

On the other hand, if the contract reverses from here, the price level at ₹61,500 can offer strong support. Subsequent support is at ₹60,000.

Published on October 09, 2021

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