Derivatives

Why silver may outshine gold

Akhil Nallamuthu | Updated on February 13, 2021

Charts look favourable to silver as key supports remain intact

Bullion witnessed muted trends last week as the prices of gold and silver, despite an attempt to rally early in the week, gave up their gains and closed flat. While rising US treasury yields and a strengthening dollar pulled down the prices of bullion the week before the last, both these factors helped in propping up prices in the first half of the last week as yields and the dollar saw a decline. However, in the second half of the week, yields rose again, weighing on bullion prices. The dollar remained sideways leading to a weak close.

The US 10-year treasury rate, after dropping to 1.122 per cent on Wednesday, recovered towards the end of the week and closed at 1.21 per cent as against 1.169 per cent a week before. On the other hand, the US dollar index – a measure of the value of US dollar against a basket of six major currencies – ended the week lower at 90.48 versus the previous week’s close of 91.04.

The nearest expiry futures contract of gold on the Multi Commodity Exchange (MCX) closed at ₹47,318 versus the previous week’s close of ₹47,256 whereas silver futures ended the week at ₹69,117 against the preceding week’s close of ₹68,738. Both saw a flat close. In dollar terms, gold gained marginally and closed at $1,823.4 on Friday compared to the previous week’s $1,811.6, a marginal gain of about 0.7 per cent; silver wrapped up the week at $27.35 versus the previous week’s close of $26.82, clocking 2 per cent gain. Going ahead, silver is well-placed to outperform gold.

MCX-Gold (₹47,318)

The week began flat for gold futures. But in the first trading session of last week, the price rallied. In the subsequent sessions, the futures attempted to break the key resistance of ₹48,000. Though it made a high of ₹48,374 on Wednesday, the contract failed to decisively close above the hurdle of ₹48,000. The weakness then started to build and as long as the futures stays below this price, the battle will be in favour of bears and we cannot reject the idea of prices falling further from here. Towards the end of last week, the contract gave up all intraweek gains. Noticeably, above ₹48,000 lies the psychological hindrance of ₹50,000 and for the trend to truly turn bullish, this resistance should be invalidated.

Corroborating the bearish inclination, technical indicators such as the relative strength index (RSI) and the moving average convergence divergence (MACD) remain in their respective negative regions. The average directional index (ADX), which denotes the strength in a trend, indicates that the downward movement is stronger. Moreover, the contract stayed below both 21- and 50-day moving averages (DMAs) and the price action on the daily charts has been forming lower highs and lower lows.

Taking above factors into account, it can be safely assumed that there is a fair bit of negative sentiment in gold and it might take some time for the buyers to turn it around. Hence, as a near-term opportunity, one can consider selling gold futures in the upcoming sessions and exit those shorts when price touches the support of ₹46,000. However, it is the short-term trend that looks weak whereas the long-term uptrend will stay unaltered so long as the price is above the support of ₹44,700; futures could touch ₹56,000 in a year or so.

MCX-Silver (₹69,117)

While gold may not support a bullish mood for bullion traders/investors, silver offers some hope. Like gold, last week was sluggish for silver, i.e., it has largely been oscillating between ₹68,000 and ₹70,500. Nevertheless, the futures is still trading above the important base of ₹65,000 and this support has prevented the near-term trend turning bearish. At least in the short run, silver can outperform gold. The likelihood of gold futures depreciating is high, but silver futures, if not rally, can be expected to trace a horizontal trend where it could remain within the broader range of ₹65,000 and ₹71,600.

There are reasons for us to believe that silver is exhibiting a positive bias. Indicators like the RSI and the MACD on the daily chart continue to hover in their respective bullish territories. Also, the ADX is showing that the bulls are stronger than the bears. Furthermore, the price is above both 21- and 50-DMAs, showing an upward trend.

In the upcoming sessions, if the silver contract breaks out of ₹71,600, it could retest the previous high of ₹74,426. Remember that the long-term trend is bullish and futures price could touch ₹80,000 within a year. Given that silver is better placed compared to gold, investors can consider going over-weight on silver within the bullion mix, at least for the near-term.

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Published on February 13, 2021
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