Gold and silver, which were already on a decline during last week, experienced a strong sell-off on Friday especially in the second half. This is because of the positive US jobs data that strengthened the dollar. Importantly, the unemployment rate fell to 5.4 per cent, the lowest since April 2020. Consequently, the bullion price came under pressure leading to a considerable weekly loss.

Gold and silver lost 2.8 and 4.4 per cent, respectively in terms of dollar as they ended at $1,762.69 and $24.33 per ounce, respectively on Friday. In the domestic market, the gold futures (October series) lost 2.8 per cent on the Multi Commodity Exchange (MCX) as it ended at ₹46,640 (per 10 grams) and the silver futures (September expiry) closed the week at ₹65,000 (per 1 Kg), losing 4.2 per cent.

That said, fund flows remained positive to gold backed exchange traded funds (ETFs) in July as per the latest data by the World Gold Council (WGC). Though the quantum was small, net inflows into gold ETFs across the world stood at 11.1 tonnes, making this the third consecutive month of inflows. Geographically, Asian and European funds saw inflows whereas the funds in North America witnessed outflows, partly offsetting the total inflows. The global Assets Under Management (AUM) in gold ETFs stands at 3,636 tonnes; this is 7 per cent below October 2020 record tonnage high of 3,909 tonnes. This can be partly due to the price remaining at lower levels compared to a year back.

A study by WGC shows that September has historically been a good month for gold, and it may produce positive returns in September 2021 as well. Supportive factors are the central banks such as the Federal Reserve focussing more on employment than inflation to maintain loose monetary policy for some more time. Interestingly, a WGC study shows that the real earnings yield plus the dividend yield of the S&P 500 has reached negative territory for the second time in last 75 years. Also, the US 10-year treasury yield has been falling since May. Since gold is a non-interest-bearing investment, a drop in yields of other assets is generally positive for the bullion.

MCX-Gold (₹46,640)

The sell-off began early last week and thus, the October futures of gold slipped below the supports of ₹47,500 and ₹47,000. The decline began at around ₹48,000, where the 21-day moving average (DMA) coincides, making this price level a stronger resistance. A close below the support of ₹47,000 gives the contract a considerable bearish bias.

The relative strength index (RSI) has fallen into the bearish territory and the moving average convergence divergence (MACD) is showing a fresh downtick. Also, the average directional index (ADX) is presenting a clear case of bears getting stronger than the bulls. In addition, the number of outstanding open interest (OIs) of all active futures contract rose to 14,904 from 13,119 a week ago - a price drop along with an increase in OI is a bearish signal and considering the above factors, the fall is likely to be extended during the coming week.

Nevertheless, the contract, which closed at ₹46,640 is near the previous low of ₹46,650. This gives a slight chance for the bulls as the difference between the closing price and the prior low is very small to term it as a break down. Hence, traders can initiate fresh short positions if the contract sustains below ₹46,650; stop-loss can be maintained at ₹47,500. Nearest support levels can be spotted at ₹46,150 and ₹45,500. On the upside, resistances are at ₹47,000 and ₹47,500.

MCX-Silver (₹65,000)

Like gold futures, silver futures has been depreciating through the week. The September futures, which closed within the resistance band of ₹67,700 and ₹68,400 in the final week of July, was unable to crossover this price band. Sellers, making use of this hurdle, started to pull down the price and the sell-off accelerated towards the end of the week. Eventually, the decline dragged the contract below the critical support of ₹65,700. The 21-DMA remains at around ₹67,700, coinciding with the afore-mentioned resistance band.

The price action is clearly bearish as the silver futures has been making lower lows since June, unlike gold futures. Besides, the RSI and the MACD are staying in their respective bearish region and, the ADX is hinting at the bears becoming stronger than the bulls. In addition, the number of outstanding OIs of all active futures contract of silver have gone up to 15,220 as on Friday, compared to 9,926 by the end of the preceding week. Thus, there is a considerable increase in the OIs along with the decrease in price, which is a bearish signal.

As there are several factors hinting at weakness in silver futures and that the contract has breached the crucial support at ₹65,700, one can consider selling the contract. That is, traders can short September futures with stop-loss at ₹66,700. The price is likely to drop to ₹64,000 and then possibly to ₹62,800 in the near-term. On the other hand, if there is any recovery, it can face roadblocks at ₹65,700 and ₹66,500.