Derivatives

Will correction in gold and silver continue?

Akhil Nallamuthu | | Updated on: Nov 27, 2021
image caption

Key support for gold and silver futures at ₹47,000 and ₹62,500 respectively

Gold and silver prices declined sharply last week along with the equities on the back of the fresh concerns of rising coronavirus cases in Europe. Also, there are apprehensions about the new variant ‘Omicron’ which is feared to be more infectious than the Delta variant.

On the trading front, both gold and silver ended with a weekly loss. That is, in terms of dollar, gold lost 2.9 per cent and silver depreciated 5.9 per cent, ending the week at $1,791.8 and $23.13 per ounce, respectively.

Similarly, on the Multi Commodity Exchange (MCX), gold futures lost 2.3 per cent and ended the week at ₹47,960 (per 10 grams) whereas silver futures declined 5.5 per cent and closed at ₹62,965 (per kg).

Nevertheless, going forward, gold may not decline further and might see gradual appreciation in price. But silver could remain weak and is likely to underperform the yellow metal.

MCX-Gold (₹47,960)

Gold futures began last week on a weak footing and witnessed a swift fall throughout the week. However, it rebounded on Friday which prevented the short-term trend turning bearish. The bullish bias will be retained until the contract trades above ₹47,000. But at the other end, it is facing resistances at ₹48,450 and ₹49,000. Thus, the bulls can be assumed to have come back only if the contract crosses over ₹49,000.

A breach of ₹49,000 can induce fresh momentum which can lift the contract above the psychological level of ₹50,000 and touch ₹52,500 -a resistance level – before the end of this year. Subsequent resistance can be spotted at ₹54,000.

On the other hand, a breach of ₹47,000 can turn the near-term outlook negative wherein the futures may drop to the support at ₹46,500. Below this is the crucial base of ₹45,920, a breach of which can turn the medium-term trend bearish.

Given the above factors, participants who have long positions can continue to hold with stop-loss at ₹47,000. With respect to fresh traders, one can wait for a strong indication on either side before pulling the trigger.

In the event of the contract breaking above ₹49,000, go long with initial stop-loss at ₹47,900.

Exit the longs when futures touch ₹52,500. Consider shifting the stop-loss to ₹48,900 if the contract rallies above ₹50,000.

Alternatively, if the futures break down below ₹47,000, initiate short positions with stop-loss at ₹48,000 – its 200-day moving average (DMA). Exit if the contract drops to ₹45,920.

MCX-Silver (₹62,965)

Silver futures, which lost 5.5 per cent, saw its biggest weekly loss since the second week of September. Unlike gold futures, silver futures failed to rebound on Friday and the bears seem to be gaining considerable ground against the bulls.

Nevertheless, by closing at ₹62,965 on Friday, the contract is hovering around the 50-DMA and it has a strong support at ₹63,000. Immediately below is an important level at ₹62,500. Thus, the price area of ₹62,500 - ₹63,000 can act as a considerable support band. A bounce from these levels can take the contract to ₹65,000 – its nearest hurdle. Resistances above this level can be seen at ₹67,000 and ₹68,340. But note that the futures should at least rally past the 21-DMA (currently at ₹65,560) for the bulls to regain their control back.

A break below ₹62,500 can change the short-term trend bearish and silver futures could see a fall to ₹60,000 and possibly to ₹58,700. The price level of ₹61,530 can be a minor support.

Hence, traders who are long can retain the position but keep tight stop-loss at ₹62,400. But for fresh trades, one should wait for further development.

Traders can initiate fresh buys if futures move above the 21-DMA i.e., ₹65,560. In this case, stop-loss can be pegged at ₹63,000. A rally above ₹65,560 can take the contract to ₹68,340 and potentially to ₹70,000. When price touches ₹68,340, liquidate 50 per cent longs, revise stop-loss to ₹65,500. Exit the remaining positions at ₹70,000. Alternatively, if the contract slips below ₹62,500, sell the contract with stop-loss at ₹64,000. At ₹60,000, liquidate 50 per cent and revise the stop-loss to ₹62,000. Exit the remaining at ₹58,700.

Silver ETFs norms announced

The Securities and Exchange Board of India (SEBI) released guidelines last week for silver Exchange Traded Funds (ETFs). This will enable investors to take exposure on silver in small quantities and will be able to hold for longer period unlike say, a futures contract. According to the circular, the physical silver that the Asset Management Companies (AMCs) hold should be of standard 30 kg bar with 99.9 per cent purity i.e., in accordance London Bullion Market Association (LBMA) delivery standards. Also, the pricing will be based on LBMA silver daily spot fixing price.

The norms say that under silver ETFs, AMCs shall invest at least 95 per cent of the net asset value (NAV) in silver and silver related instruments which includes Exchange Traded Commodity Derivatives (ETCDs). Yet, exposure to ETCDs should not be more than 10 per cent of the NAV. Although it can be above 10 per cent if AMCs intend to take delivery. On the other hand, the cumulative gross exposure should not exceed 100 per cent of the NAV. The rules also say that the tracking error should not go above 2 per cent and in case if that occurs, it should be disclosed prominently on the website of AMC. Moreover, a dedicated fund manager is to be appointed for silver and gold ETFs.

NAV shall be disclosed on daily basis on AMCs’ website. Further, the ETF units will be listed on stock exchanges where the NAV will be disclosed on continuous basis during trading hours.

Published on November 27, 2021

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