Derivatives

Will gold bounce back this week?

Akhil Nallamuthu | Updated on January 16, 2021

Slew of factors are building a good foundation for the bulls to work their way up

The World Gold Council (WGC) came up with its 2021 outlook for gold last week. According to the report, gold may see a positive, though more subdued, performance in 2021. This may be driven primarily by a recovery of consumer demand relative to 2020 as economic conditions improve. Citing that low interest rates can encourage investors to add risky assets in their portfolio, the report also said risks such as expanding budget deficits, inflationary pressure and possible market correction on the back of high equity valuations can be supportive for gold prices as investors might go in for hedging and diversification.

Last week, WGC also came up with latest ETF (exchange-traded fund) numbers which showed that in December 2020, net outflows from these funds stood at 40.1 tonnes. While ETF net fund flows remained negative for the second consecutive month they have substantially come down compared to November’s net outflow of 108.7 tonnes, even though the average price of gold in December was higher.

Further affirming the positive bias, the latest data on COMEX net long positions recorded at 873 tonnes as on January 5 is better than the past month and this is the highest level since the first week of August last year. These factors are building a good foundation for the bulls to work their way up.

The prices of gold and silver remained muted throughout last week following a sudden decline in the preceding week. The futures price of gold on the Multi Commodity Exchange (MCX) ended the week at ₹48,702 (per 10 grams) against the previous week’s close of ₹48,967.

The futures price of silver on MCX closed at ₹64,980 (per kg) versus preceding week’s ₹64,231.

In dollar terms too, both ended the week largely unchanged. Gold closed at $1,828.4 (per ounce) whereas silver ended at $24.77 (per ounce).

MCX-Gold (₹48,702)

February futures of gold witnessed a minor slip-up early last week as it opened lower at ₹48,786 as against the previous week’s close of ₹48,967. But the bears could not extend their dominance as the contract found support at ₹48,600. Although the price did not move up, the downfall from the week before was arrested. This is despite technical indicators like the relative strength index (RSI) and the moving average convergence divergence (MACD) on the daily chart signaling weakness. The average directional index (ADX) is showing that the downtrend has gained good strength.

In the light of this, one should not go all in now but should look for evidence corroborating a build-up in the uptrend. For instance, traders hunting for short-term opportunities can consider going long if futures rally past ₹50,000 with good volume.

Notwithstanding the above conditions, investors or traders who are looking to hold longs for more than one year can consider initiating fresh longs incrementally. Within a year, gold futures can appreciate to ₹56,000 and over next two- to three-years to ₹60,000 and ₹65,000. From a long-term trend perspective, ₹47,550 is a key support.

MCX-Silver (₹64,980)

The March futures contract of silver, like gold futures, began last week with a small gap-down. It opened at ₹63,603 versus preceding week’s close of ₹64,231; but slightly recovered. Comparatively, over the past couple of weeks, it has underperformed the yellow metal. While gold futures is down by about 6.1 per cent from its recent high, silver futures has lost 9.5 per cent.

However, unlike the former, the price of the latter is above the 50- and 200-DMAs and the MACD is hovering the positive territory, indicating a certain degree of positivity. That said, rather than going long at current levels, one can consider initiating short-term longs if price breaches the nearest hurdle at ₹68,000 with considerable volume. Because this can bring in fresh bulls which were held back fearing the potential shift in the near-term trend to bearish.

Investors or traders looking to make fresh entries with holding horizon of one year and more can consider building up longs gradually. Silver futures can potentially rally to ₹75,000 in a year, and to ₹80,000 and ₹85,000 in a couple of years.

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Published on January 16, 2021
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