Derivatives

Why you should hold on to gold, silver long positions

Akhil Nallamuthu BL Research Bureau | Updated on October 23, 2021

Gold and silver futures gain for four weeks in a row; momentum favouring the bulls

Gold and silver posted gains last week and ended in the green for the fourth consecutive week, a strong indication of the bulls getting back in charge.

Amidst this, the World Gold Council (WGC) came up with Indian import data on Friday. Despite gold prices staying low in September, imports declined for the month to 89.5 tonnes against 121.8 tonnes in August — a 27 per cent drop— as retail demand softened. Nevertheless, WGC forecasts demand to be strong in October.

But the Reserve Bank of India (RBI) added 19.7 tonnes in September compared to 13.9 tonnes in the previous month. Thus, the gold reserves now stand at 744.8 tonnes, which is 6.5 per cent of the total reserves. Notably, RBI’s monthly purchase in September is the highest since the central bank started buying gold consistently from December 2017. The RBI has added 68.2 tonnes in first three quarters of the current calendar year.

On the price front, bullion seems to be making steady progress since past one month and in line with this, both gold and silver gained last week. In the international spot market, gold appreciated by 1.4 per cent and silver gained 4.3 per cent and closed the week at $1,792.5 and $24.28 per ounce, respectively.

Similarly, on the Multi Commodity Exchange (MCX), gold futures went up for the week by 1.2 per cent and silver futures gained 3.8 per cent. On Friday, gold and silver futures closed at ₹47,797 (per 10 grams) and ₹65,656 (per kg), respectively. The current scenario suggests more gains during the weeks ahead.

MCX-Gold (₹47,797)

The sharp fall a fortnight ago might have raised doubts over the ability of the bulls to retain the bias in their favour. But last week, gold futures (December expiry) on the MCX managed to inch upwards and importantly, it sustained above the support of ₹47,000 and above both 21- and 50-day moving averages (DMAs). However, the contract is yet to breach the resistance band of ₹47,800-48,000. Noticeably, the 200-DMA lies within this price band and therefore this can be a significant challenge for the bulls.

Yet, there are several factors substantiating the positive outlook. The relative strength index (RSI) and the moving average convergence divergence (MACD) remain in the bullish zone. The average directional index (ADX) shows that upward momentum is strong. The total open interest (OI) of the active futures contract has gone up from 14,246 to 14,469. The price rise accompanied by increase in OI is a bullish sign.

In the forthcoming sessions, gold futures is well placed to get past the resistance at ₹48,000. A breakout can be followed by a swift rally to ₹49,000 where it can witness a pause and can appreciate further to touch ₹50,000. Hence, traders can take long positions at current levels and can add more if price corrects to ₹47,150. Stop-loss can be placed at ₹46,500. When the contract reaches ₹49,000, consider booking partial profits and then revise the stop-loss up to ₹48,000 and look to exit the remaining at ₹50,000. There can be a correction once the contract hits this level.

Immediate supports from the current levels can be seen at ₹47,000 and ₹46,000.

MCX-Silver (₹65,656)

Silver continued to shine and extended the rally last week as well and so, the December futures of silver on the MCX breached the resistance at ₹64,300 and managed to close above ₹65,500 for the week. As it stands, the uptrend looks strong and there are no signs of weakness. Considering the prevailing price action, the contract will most likely move up in the coming weeks.

Substantiating the bullish inclination, indicators such as the RSI and the MACD on the daily chart are exhibiting strong upward traction and the ADX continues to show bulls’ dominance. This is also supported by how new positions are being built up. That is, as the price moves northwards, the total number of OIs of all active silver futures on the MCX has gone up to 12,367 as on Friday compared to 11,937 by the end of previous week.

Silver futures will most probably witness a rally from here towards the immediate hurdle at ₹67,700. Subsequent resistance can be spotted at ₹69,250 – the 200-DMA. Above that lies the important barrier of ₹70,000. Hence, traders can consider buying silver futures at current level of ₹65,656 and accumulate if price declines to ₹64,300; initial stop-loss can be at ₹63,000. Exit partially when price reaches ₹67,700, shift stop-loss to ₹65,500 and let the remaining run to ₹69,250.

If there is a price drop from the current levels, the nearest supports are at ₹64,300 and ₹63,000.

Published on October 23, 2021

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