Will gold and silver extend last week's rally?

Akhil Nallamuthu BL Research Bureau | Updated on December 19, 2020

Outlook for silver more bullish than for the yellow metal

Extending the preceding week’s rally, bullion prices appreciated last week. Bulls appear to be back in the driving seat and the price action in both gold and silver hints at a further rally in the upcoming sessions.

Precious metal prices have been upbeat despite the Federal Reserve not announcing any additional monetary injections which were expected to be a significant driver forward. While maintaining status quo with respect to its benchmark interest rate, the Fed refrained from announcing a fresh round of stimulus. This can be attributed to better economic projections released along with the policy rates. There is an upward revision in the GDP growth rate and a downward revision in the unemployment rate compared to September projections. This also fuelled hopes that a stimulus is imminent from the US government, which kept prices up.

What could have possibly buoyed prices was improved manufacturing and services PMI (Purchasing Managers Index) data from both the US and the euro regions, released last week. Latest data exceeded expectations and indicated considerable expansion in economic activity. Although this should have nullified safe-haven demand, bulls kept their nerves and pushed bullion prices up.

The spot price of gold on the Multi Commodity Exchange (MCX) gained by nearly 1.7 per cent last week as it ended at ₹49,790 (per 10 grams) and the spot price of silver on the MCX gained by about 6.6 per cent last week as it closed at ₹66,327 (per kg). In dollar terms, gold wrapped up the week at $1,880, up by 2.3 per cent from last week, and silver closed at $25.75, gaining 7.5 per cent for the week.

MCX-Gold (₹50,200)

Rebounding from the support of ₹49,000, the futures contract of gold on MCX (February 2021 expiry) advanced above the key level of ₹50,000. Since buyers managed to push the price through this crucial level, it has opened the door for further strengthening. Last week, the contract posted a gain of nearly 1.8 per cent; it has gained by about 5.5 per cent from its recent low of ₹47,551 made by the end of November.

On the daily chart, it has been forming higher highs and higher lows in December – a bullish indication. This also means the short-term trend, which was inclined to downside till last week, now looks positive.

Corroborating the upward bias, the relative strength index (RSI) moved into bullish zone and the moving average convergence divergence (MACD), though below the zero-level, has turned upward and is currently on the verge of entering the positive territory.

The aforementioned factors indicate that this up move can go farther with the nearest resistance being ₹51,000, where the 38.2 per cent Fibonacci retracement level of the prior downtrend coincides. Subsequently, it can face a roadblock at the resistance band of ₹52,000 and ₹52,500. While these levels can attempt to block the bulls in near-term, the major trend remains bullish and so prices can touch ₹60,000 and possibly ₹65,000 over the next couple of years.

MCX-Silver (₹67,720)

Even as the gold futures contract trading with a bearish bias during the past two months, the futures contract of silver on MCX (March 2021 expiry) was on a horizontal path. Silver has been outperforming gold because of its dual nature of being a part of safe-haven asset class as well as an industrial metal.

This can be measured by the recent performance, i.e., the silver contract registered a gain of 6.2 per cent in the last week compared to gold’s 1.8 per cent and it has advanced by about 15 per cent since marking its recent low of ₹58,880 as against gold’s 5.5 per cent.

The price action of silver futures, by breaking out of the resistance at ₹66,000, has confirmed a double bottom chart pattern on the daily charts, indicating a bullish trend reversal. It has also crossed over the 50 per cent retracement level of the previous downswing at ₹67,000. Moreover, the RSI and the MACD indicators show fresh uptick affirming the bullish inclination. Hence, the price of silver futures is likely to move upwards from here.

The contract can face hindrance at the price band between ₹70,000 and ₹71,400. Beyond this level, it can rally to ₹74,000 as indicated by the double bottom chart pattern. While these are the resistance levels from short-term perspective, the price is likely to hit ₹80,000 and can even reach ₹85,000 over next two to three years since the major trend stays up.

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Published on December 19, 2020
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