Derivatives

Will gold be able to break ₹47,600 barrier?

Akhil Nallamuthu BL Research Bureau | Updated on August 22, 2021

This is a strong resistance against which bears could attempt to gain back control

The FOMC (Federal Open Market Committee) meeting minutes released on Wednesday triggered some volatility in bullion, as the report showed the willingness of the Fed to begin tapering this year. The US dollar (USD) responded with a sharp gain taking the dollar index (DXY) to a nine-month high of 93.59, weighing on bullion prices. However, gold recouped its losses towards the end of the week. Silver did not recover and remained weak.

More than tapering, a rate hike could have more impact on bullion as treasuries, along with the safety factor, provide interest income. Rising rates can push investors to reallocate funds at least partially from bullion to treasury securities. But there is no clear indication of when the Fed could start its rate hike cycle, providing some breathing room for precious metals.

On a weekly basis, gold and silver showed divergence i.e., gold closed flat for the week as it ended at $1,780.9 per ounce whereas silver lost 2.7 per cent as it closed at $23.01 per ounce on Friday. Similar difference in performance can be seen in the domestic market as well. The gold futures (October expiry) gained nearly 0.5 per cent last week as it closed at ₹47,158 (per 10 grams) but silver futures (December series) lost 2.3 per cent as it ended the week at ₹62,475 (per 1 kg) on Friday.

MCX-Gold (₹47,158)

October futures of gold, which opened on the front foot last week, failed to establish a rally. Although it crossed over the critical level of ₹47,000 and made an intraweek high of ₹47,850, the contract could not hold on to its gains.

Blocking the bulls was the resistance at ₹47,600, where the 50-day moving average coincides. This is a strong barrier against which bears could attempt to gain back control. A fall from ₹47,600 means the contract would form a lower high. It has been charting lower highs and lower lows since the beginning of June, giving it a bearish inclination. The relative strength index (RSI) and the moving average convergence divergence (MACD) on the daily chart lies in the negative zone.

Given prevailing conditions, the contract is likely to decline from current levels. Despite the contract remaining above ₹47,000, the price action does not show signs of a recovery and a prolonged sideways movement at current levels could attract fresh sell signals, given that ₹47,600 is acting as a substantial hurdle.

Thus, one can remain bearish until the price is below the 50-DMA and initiate fresh short positions with stop-loss at ₹48,000. The futures could see its price drop to ₹46,650 – its nearest support. A break below this level can result in the contract retesting the low of ₹45,660. Resistances above ₹47,600 can be spotted at ₹48,000 and ₹48,500.

MCX-Silver (₹62,475)

Like gold futures, silver futures (December series) began the session on a positive note. However, after marking a high of ₹64,625 on Tuesday, the contract reversed and started to drift lower. The decline continued throughout the week, ending with a loss of 2.3 per cent for the week. Silver continues to stay bearish and as long as the price remains below the crucial level of ₹65,000, the contract is likely to be under the control of bears.

Affirming the weakness, the RSI and the MACD on the daily as well as the weekly chart are in the bearish territory and the price remain much below both 21- and 50-DMAs. The average directional index (ADX) too indicates that bears possess more strength than the bulls. Besides, the total outstanding open interest (OI) of all active futures of silver on the MCX stood at 16,531 as on Friday compared to 14,538 contracts by the end of the preceding week. An increase in OI with a fall in price means building up of fresh short positions.

Above factors clearly indicate high likelihood of silver futures depreciating further. Thus, traders can sell the contract with stop-loss at ₹64,700. The price will most probably fall to the psychological level of ₹60,000. A breach of this level can drag the contract lower. If the contract rallies above ₹65,000, the short-term trend could turn bullish and touch ₹66,700.

Gold-Silver ratio

Gold-silver ratio, at around 76, has been moving upwards from the key base of 65 – the lowest since 2014. This means, there is more room on the upside which places gold at an advantage over the silver, at least in the near-term. To gain from this, one can consider going long in gold futures and simultaneously shorting silver futures. But this ratio is only an indication and cannot be considered as a sole factor in concluding that the gold can outperform silver.

Published on August 21, 2021

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