Derivatives

Will ₹47,000 hold for gold?

Akhil Nallamuthu BL Research Bureau | Updated on August 28, 2021

While gold gained 0.8 per cent last week, prolonged consolidation at current levels is not good

Lockdown restrictions being gradually lifted seem to be helping gold, which is reflected in the India’s import data. According to World Gold Council (WGC), Indian official imports rebounded in July as States eased lockdown restrictions. Imports totalled 72.3 tonnes in July 2021, which is more than double the 29.7 tonnes imported in June 2020. It more than tripled compared to 15.8 tonnes imported in June 2021. The Council expects imports to be better in August 2021 as well. The correction in price during the month is expected to result in increased retail demand in India.

The Reserve Bank of India (RBI) purchased an additional 5.6 tonnes of gold in July after adding 9.4 tonnes during the previous month, thus taking the total gold holdings of the central bank to 711.2 tonnes i.e., 6.7 per cent of the total reserves. WGC predicts that the central bank is likely to buy gold at the same or higher levels than in 2020, creating tailwinds for the yellow metal. While fundamentals seem to be improving, trading signals in bullion are not very encouraging.

Last week, gold ended the week with 2 per cent gain at $1,816.7 per ounce and futures (October series) on the Multi Commodity Exchange (MCX) closed at ₹47,538 (per 10 grams) gained 0.8 per cent. On the other hand, silver ended with a gain of 4.3 per cent by wrapping up the week at $24 per ounce; the December futures of silver on the MCX gained 2.5 per cent as it closed at ₹64,063 (per 1 Kg) on Friday.

MCX-Gold (₹47,538)

Extending the sideways trend from the week before, the October futures of gold was trading flat last week too. The horizontal price pattern shows that the contract is being held within ₹47,000 and ₹47,600. Unless either of these levels are breached, the direction of the short-term trend will be unclear.

However, price action on the daily chart shows that the futures has been bearish since early June as it continues to form lower lows and lower highs. Also, the recent price movement shows that ₹47,600 has been resisting the bulls strongly. That means, the trend may be inclined towards a downward swing so long as the price lies below resistance at ₹47,600. The contract price also lies below the 50-day moving average (DMA), a bearish signal.

In addition, the relative strength index (RSI) and the moving average convergence divergence (MACD) indicators on the daily and weekly charts lies in the negative zone. Given that gold futures has been weak for nearly three months, prolonged consolidation at current levels will increase the likelihood of bears gaining back control thereby dragging down the price.

Taking the above factors into account and that the price point of ₹47,000 is a support, traders can initiate fresh short positions of the contract if it decisively breaks below this support; in this case, stop-loss can be placed at ₹47,800. The immediate support below ₹47,000 can be seen at ₹46,650 and breach of this level can result in the contract retesting the prior low of ₹45,660. Hurdles above ₹47,600 are at ₹48,000 and ₹48,500.

MCX-Silver (₹64,063)

Similar to gold futures, silver futures (December series) has also been charting a sideways trend for the past couple of weeks i.e., it has been moving across the price band of ₹62,000 and ₹64,700. While the near-term trend is uncertain, the medium-term trend is bearish, and it will stay so until the price remains below ₹70,000. The 21-DMA currently coincides with the upper end of the range i.e., ₹64,700, making it a considerable barrier.

Looking at the price action since July, the contract has been consistently stopped by the 21-DMA, meaning, sellers have been using this level to create fresh short positions resulting in a dip in price. The RSI on the daily and weekly charts continues to hint at bearish bias and the daily average directional index (ADX) shows that the downtrend possesses considerable momentum. However, the MACD on the daily chart is now showing some signs of recovery and the drop in the number of outstanding open interests (OI) of all active contracts over the past week (to 10,657 contracts from 16,531 contract by the end of previous week) hints that the bears are losing strength. Yet, the recovery cannot be sustainable at least until the contract surpasses resistance at ₹64,700.

The above factors might call for going short on silver futures. But participants are recommended to wait for the breach of the support at ₹62,000 i.e., sell the December silver futures below ₹62,000 and maintain stop-loss at ₹64,000. If the contract slips below ₹62,000 it will most probably touch the psychological level of ₹60,000 in the near-term. Support below ₹60,000 is at ₹58,000. If the futures rally beyond ₹64,700, it can potentially rise to ₹66,800 – the nearest resistance.

Published on August 28, 2021

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