Why gold will continue its sideways move

Gold seems to be gaining back investors’ confidence as seen from the fund flows in the gold ETFs (exchange traded funds). The World Gold Council (WGC) data shows that the gold ETFs saw net inflow of 13.6 tonnes in November - the first month of positive inflow since July. North American and European region experienced inflows which were considerably higher than Asia, which saw outflows for the first time since May. In October, the net outflows stood at about 25 tonnes.

Similarly, the net long positions of gold on COMEX have shot up showing speculators’ bullishness on the yellow metal. The data by the Commodity Futures Trading Commission (CFTC) shows that the net longs, at about 783 tonnes in November, is the highest since January this year. This along with the positive ETF inflows are despite the average price of gold being higher than what it was a couple of months ago.

The positivity in gold was largely due to the fear that higher inflation could be persistent and the broader market witnessing higher volatility. Omicron, which continues to spread across the globe, is a source of fresh concerns and could help the bullion form a strong base in price.

On the trading front last week, gold remained flat, and silver was showing a negative bias. In dollar terms, gold, ended the week flat at $1,782.5 per ounce versus the previous week’s close of $1,783.7. On the other hand, silver depreciated by 1.5 per cent and closed at $22.16 per ounce. However, in the domestic market, the bullion was not as weak because of a decline in the rupee (by 0.8 per cent) against the dollar. On the Multi Commodity Exchange (MCX), gold futures (February series) closed at ₹48,164 (per 10 grams), up 0.5 per cent. The MCX Silver futures (March expiry) lost 0.6 per cent and ended at ₹61,151 (per kg).

MCX-Gold (₹48,164)

The February expiry futures of gold on the MCX, which ended last week with a gain of 0.5 per cent, was largely moving in a sideways range throughout the week. The price action does not show any inclination on either sides and there are high chances for the contract to retain the range in the near-term.

That means, the broad range of ₹47,000 - ₹49,000 remains valid. Notably though, within these price levels, the contract is oscillating within ₹47,400 and ₹48,500. A breach of either of these levels can give us a hint about the next leg of trend. The flat trend is shown by the relative strength index (RSI) and the moving average convergence divergence (MACD) as they hover in the neutral region.

A move above ₹48,500 can turn the outlook positive. In this case, it can be expected to rally past ₹49,000 and touch ₹50,000. Resistances above this level are at ₹52,500 and ₹54,000. But if the contract breaks below ₹47,400, it can experience a fresh bout of selling which can drag the futures down to ₹46,500. It can possibly depreciate to ₹45,920 – a crucial support. A breach of this level can turn the medium-term sentiment bearish.

Given the prevailing circumstances, one can stay on the fence and initiate fresh trades along the direction of the break of the price band ₹47,400 - ₹48,500. Initiate fresh longs if gold futures rallies above ₹48,500 with initial stop-loss at ₹47,600. When the contract reaches ₹49,500, revise the stop-loss to ₹48,500. Exit at ₹50,000 as this can be a hurdle.

MCX-Silver (₹61,151)

Silver futures underperformed gold futures last week too as it lost 0.6 per cent whereas gold futures was up by half a per cent. While it was flat in the first half of the week, the contract witnessed increased volatility towards the end of the week. The chart continues to show weakness and thus further decline from here is very much a possibility.

Confirming the bearish bias, the 21-day moving average (DMA) has slipped below the 50-DMA. Also, RSI and MACD on the daily chart stay in the negative territory. However, both RSI and MACD are now showing a bit of weakness in the down-move. This is not a sign of trend reversal, but one should alter risk-reward accordingly.

Last week we had recommended short at ₹61,516 and ₹62,500 with stop-loss at ₹64,350. Hence, participants who hold short positions can continue to retain the positions. However, revise the stop-loss to ₹63,000 from ₹64,350. For fresh trades, wait for the contract to rally to ₹62,000. That is, sell at ₹62,000 with stop-loss at ₹63,000. Note that these are short-term trades.

From the current levels, the supports are at ₹60,000 and ₹57,800. On the other hand, the price area of ₹62,500 - ₹63,000 can resist the rally. Above these levels, ₹64,150 can be a barrier, where 21- and 50-DMA coincide.

So, for the short positions (both existing and fresh ones), revise the stop-loss downwards to ₹62,000 if the contract falls to ₹60,000. Liquidate entirely if the contract drops to ₹58,000.

COMMENT NOW