Derivatives

Will gold and silver resume their rally?

Akhil Nallamuthu BL Research Bureau | Updated on October 30, 2021

There has been a recovery in bullion prices since October

The World Gold Council (WGC) released its latest gold statistics last week and the data shows that demand for the yellow metal in third quarter of 2021 was down by 7 per cent (y-o-y) to about 831 tonnes. The drop is seen after increasing in the past two quarters. The decline in demand was primarily driven by the ETFs (Exchange Traded Funds) which saw net outflows of 27 tonnes compared to an inflow of 274 tonnes in the same quarter of the previous year. Jewellery demand was 33 per cent higher at nearly 443 tonnes and demand from technology were up by 9 per cent. Net buying by central banks stood at 69.3 tonnes compared to net selling of nearly 11 tonnes.

The data suggests that lower prices of gold taken with economic recovery, propped up jewellery demand, while investors were discouraged by returns to offload ETFs. Year-to-date demand too saw a dip to 2,663 tonnes as against 2,939 tonnes during the corresponding period last year.

There has been a recovery in prices since October which can attract ETF investments. Hopefully economic recovery can keep the consumer sentiment on jewellery positive. Nevertheless, the price of gold stayed largely flat and silver price saw a marginal correction over the past week as the overall commodity market came under pressure.

In the international spot market, gold lost about 0.5 per cent and ended the week at $1,782.8 whereas silver lost 1.9 per cent and closed at $23.85 per ounce. Similarly, on the Multi Commodity Exchange (MCX), gold futures was down by 0.3 per cent for the week, closing at ₹47,635 (per 10 grams) and silver corrected by 1.7 per cent to end the week at ₹64,534 (per 1 Kg).

MCX-Gold (₹47,635)

The uptrend in gold futures (December series) seems to be facing a challenge as it has failed to crack the resistance of ₹48,000 last week. Although it rallied past this level early on and made a high of ₹48,299, the contract was not able to hold above the level and fell back below ₹48,000 in the very next session. It can be assumed that the short-term uptrend remains valid but there can be a minor correction before the contract decisively breaches ₹48,000.

The bullish inclination is corroborated by relative strength index (RSI) and the moving average convergence divergence (MACD) on the daily chart since they remain in their respective positive territory. The price is above both 21- and 50-day moving averages (DMAs) and so long as the price is above the ₹47,000 support, the near-term bull trend will not come under threat. However, given the prevailing conditions, a price correction to ₹47,000 cannot be ruled out.

Traders who already hold long positions can continue to hold and others can wait for now and go long when price softens to ₹47,000. In both cases, the initial stop-loss can be placed at ₹46,500. A recovery from ₹47,000 can quickly lift the contract to ₹48,000. If the contract breaks out of this level and reach ₹49,000, consider booking half the profits and shift the stop-loss to ₹48,000. The remaining positions can be liquidated if the contract touches ₹50,000.

The nearest supports from the current levels can be spotted at ₹47,000 and ₹46,000.

MCX-Silver (₹64,534)

Silver, which has been outperforming gold since the beginning of the month, declined and registered a loss of 1.7 per cent whereas gold saw a minor drop in price last week. Even as the December futures opened on Monday on the front foot, the contract quickly made a U-turn and was sliding through the week.

However, the fall is most likely to be a corrective decline and not a bearish trend reversal. Supporting this, the contract has a confluence of supports from the current level of ₹64,534. There is a support at ₹64,300 below which lies the 21-day moving average at ₹63,280 and subsequently, there is a support at ₹62,500. So, this means, the chances are high for the contract to resume the uptrend within the price band of ₹62,500 and ₹64,300. Until the price stays above these levels, the trend will continue to be bullish. The RSI and the MACD on the daily chart continue to stay in the bullish region.

Considering the above factors, one can go long at ₹63,280 and accumulate when price moderates to ₹62,500 and keep preliminary stop-loss at ₹61,000. The likelihood of the silver futures slipping below ₹62,500 is less and if it comes back to the upward path, the first resistance it may face can be at ₹66,700. A breakout of this level can push up the price to ₹70,000. So, half of longs can be liquidated at ₹66,700 revising the stop-loss upwards to ₹65,000. Exit the rest of the longs at ₹70,000.

Published on October 30, 2021

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