Derivatives

Will ₹47,000 support hold for gold this week?

Akhil Nallamuthu BL Research Bureau | Updated on July 24, 2021

The precious metal has posted a loss for the first time in five weeks

Gold, which has been gaining this past month, faced selling pressure and posted a loss for the first time in five weeks. Silver continued its decline for third straight week.

That said, the recent report by the World Gold Council (WGC) says that the retail demand in India improved in June as lockdowns eased across states. Jewellery demand improved and so did investment demand. The subdued price attracted more Indian investors to gold, which is evident from 1 tonne demand for gold ETFs in June. Total holdings increased to 34.2 tonnes, the highest since September 2013. Besides, the accumulation of gold by the Reserve Bank of India (RBI) continued as the central bank added 9.4 tonnes, taking its gold holding to 705.6 tonnes, as per WGC.

Imports at 15.8 tonnes remain well below the five-year June average of 41.8 tonnes. Nevertheless, if the jewellery demand and ETF inflows continue it can put upward pressure on gold prices as India is one of the largest importers of the yellow metal. Gold ETFs in China too saw a healthy inflow of 2.1 tonnes in June, a positive development for gold.

But last week, both gold and silver were seen declining. While gold lost 0.5 per cent, silver lost 2 per cent to close the week at $1,801.3 per ounce and at $25.16 per ounce, respectively. Similarly, gold futures (August expiry) on the Multi Commodity Exchange (MCX) lost 1 per cent as it closed at ₹47,534 per 10 grams on Friday. Silver futures (September expiry) on the MCX fell by 1.9 per cent as it ended the week at ₹67,024 per kg.

MCX-Gold (₹47,534)

Having rallied over the past month, August expiry gold futures on the MCX faced the key barrier of 200-day moving average (DMA) at around ₹48,440. Reacting to the resistance, the bulls loosened their grip and consequently, the price started to move down as sellers stepped in. The decline continued throughout the week and now the price is below the 21-DMA. There are certain bearish indications popping up now. The relative strength index (RSI) has slipped into negative region and the average directional index (ADX) shows that the bears are at an advantage.

However, the contract has strong support at ₹47,000 below which ₹46,330 is a considerable support. The price band of ₹46,330 and ₹47,000 has been providing cushion for the contract since mid-April.

Thus, any decline cannot be categorised as downtrend until this price band holds. In fact, the contract may rebound from this price region. So, traders can wait and risk initiating fresh longs if the contract softens to these levels.

On the way up, the contract will face hindrance at ₹48,440, which can be the target for the longs.

But we should note that the price action on the daily chart hints at a possible consolidation phase with the lower and the upper boundaries possibly at ₹47,000 and ₹48,440 respectively.

Resistance above ₹48,440 is at ₹50,000 whereas support below ₹47,000 are at ₹46,330 and ₹45,000.

MCX-Silver (₹67,024)

Silver futures, that declined during the week before last week, managed to remain within the range of ₹67,700 and ₹70,000. However, the futures broke below the support of ₹67,700 on the first session of last week.

Even though it recouped some of its losses during the second half of the week after marking an intraweek low of ₹66,286, the contract fell short of closing the week above the support of ₹67,700.

So, there is a clear breakdown, and the contract can be expected to drop further in the upcoming week.

Affirming the bearish trend, the RSI and the MACD (moving average convergence divergence) indicators are showing a fresh downtick.

The ADX shows that the bears continue to have upper hand over the bears and the price is well below the 21-DMA, indicating good downward momentum.

On the daily chart, the price action – a down move followed by a consolidation and then a break down – is a bearish signal.

Nevertheless, the total number of outstanding OI of all active futures contract of silver on the MCX saw a drop to 13,265 as on Friday compared to 13,314 a week ago, hinting at possible loss in interest by sellers.

But as bearish factors outweigh bullish indications, traders can consider going short in silver futures.

The contract is highly likely to touch the important support of ₹65,000 in the coming days.

A clear breach of this level can drag the contract to ₹63,000. If buyers can push the price upwards of ₹67,700, the contract can retest the critical support at ₹70,000.

Published on July 24, 2021

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