Derivatives

Will gold break a key barrier this week?

Akhil Nallamuthu BL Research Bureau | Updated on April 24, 2021

The likelihood of a minor correction in price at this juncture cannot be ruled out

Gains continued for gold and silver for the fourth straight week in the domestic market and for the third straight week in the international market. While some of the recent gains can be attributed to the depreciating dollar, supportive market sentiment is also evident.

Net long positions in the COMEX have increased for the first time in the last four months according to the Commitment of Traders by the Commodity Futures Trading Commission (CFTC). Net longs were up from 528.7 tonnes in March to 572 tonnes in April. Though two more weeks are left for the month to close, the price action is likely to keep the bulls entertained.

The price of gold futures on the Multi Commodity Exchange (MCX) went up by 0.4 per cent over the past week as it closed at ₹47,532 (per 10 grams) on Friday and the price of silver futures on the MCX ended the week flat at ₹68,674 (per kg). A similar trend was observed in dollar terms as well. Gold posted a gain of 0.8 per cent as it ended at $1,777.2 whereas silver ended the week flatat $25.99 on Friday.

Considering the performance so far in 2021, silver is outperforming gold as it has recovered all the losses it made since the beginning of the year, whereas the latter is still down by about 6 per cent for the year.

MCX-Gold (₹47,532)

Gold futures experienced a positive start last week as the price has been steadily gaining in the first half. However, in the latter half of the week the June futures of the yellow metal on the MCX gave away most of the gains and ended with about 0.4 per cent weekly gain. Yet, looking at the price action on the daily chart, there are no signs of weakness and the contract seemed to retain its bullish inclination, as it continues to form higher highs.

Substantiating the same, the daily relative strength index (RSI) rose last week, and it remains in bullish territory. The moving average convergence divergence (MACD) indicator on the daily chart stays in the positive zone and maintains the positive slope. The 21-day moving average (DMA) has crossed over the 50-DMA, a bullish indication. The total open interest of the active contracts has gone up to 13,766 contracts from 13,658 contracts a week ago.

However, there are certain factors that bulls should be wary about. The resistance at ₹48,300 continues to remain valid because, despite the contract marking an intraweek high of ₹48,429, it could not close above it. In addition, the downward sloping trendline that joins the prior two highs lies at around ₹48,500 and this makes the price band between ₹48,300 and ₹48,500 a considerable resistance band. While this is not a sign of bearish trend reversal, one should consider these factors for better risk management.

Hence, though the trend in gold futures is bullish, traders can wait until the above resistance band is invalidated before initiating fresh trades. Those who already own long positions can start maintaining a tight stop-loss. The nearest resistance above ₹48,500 is ₹50,000 above which ₹51,600 can be a hindrance. Support levels are at ₹47,000 and ₹46,000.

MCX-Silver (₹68,674)

The silver futures on the MCX, unlike gold futures, saw a muted opening and were oscillating in a narrow range in the first couple of sessions. The contract then rallied and moved above ₹70,000 mid-week but gave up gains towards the end of the session. So, on week-on-week basis, silver ended flat. Nevertheless, the daily chart appears bullish as the contract continues to form higher highs and the price stays above both 21- and 50-DMAs. It also trades above a key support at ₹67,700 where 50- and 200-DMAs coincide.

Furthermore, indicators like the RSI and the MACD on the daily chart remain in their respective positive territory and the open interest has risen along with the price, affirming the positive trend. That is, the open interest of the active futures has increased to 10,496 contracts from 10,059 contracts by the end of previous week.

The May futures contract, after registering an intraweek high of ₹70,425, moderated and ended the week below ₹70,000 — a resistance level. Given this, fresh long orders are not recommended until ₹70,000 is decisively breached. Consider tightening stop-loss for existing buy positions. A breakout of ₹70,000 can attract good amount of buying interest and the momentum could improve considerably. While ₹71,850 is the immediate resistance, a rally past this price point can take the contract to ₹75,000. The price range of ₹67,000 and ₹68,000 continues to be a critical base for the contract.

Additionally, the fundamentals can be supportive for silver as the World Silver Survey 2021 by the Silver Institute projects good demand arising out of industrial (8 per cent increase to record high of 16,299 tonnes) and jewellery (significant 24 per cent increase to 5,734 tonnes) use in the current year. According to the report, investment demand too is projected to stay strong as monetary policy across the globe continues to be expansionary. Physical investment is expected to go up by 26 per cent to 7,862 tonnes this year.

Published on April 24, 2021

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