Derivatives

Will gold break its listless spell?

Akhil Nallamuthu | | Updated on: Dec 04, 2021
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Go long if gold futures rallies above ₹48,500 with initial stop-loss at ₹47,700

The sell-off in gold and silver, which began a fortnight ago, remains intact. The downside momentum remains as both precious metals ended last week with a loss for the third consecutive week. During the past week, gold made a fresh one-month low of $1,761.7 whereas silver registered two-month low of $22.03.

On Friday, the US Non-Farm Payroll data was released post which there was increased activity in the dollar. This in turn increased the volatility in bullion prices. Post all the actions, in the international spot market, gold closed the week with a loss of nearly 0.5 per cent at $1,783.7 per ounce whereas silver was much weaker and depreciated by 2.7 per cent, wrapping up the week at $22.51 per ounce.

Similarly, on the domestic Multi Commodity Exchange (MCX), gold futures (February expiry) closed the week at ₹47,903 (per 10 grams) down marginally by 0.1 per cent. Silver futures (March series) lost 2.3 per cent and ended at ₹61,516 (per kg). The underperformance in silver is likely to stay for a while.

That said, the Commitment of Traders (COT) report by the Commodity Futures Trading Commission (CFTC) shows that the net long positions have come down in COMEX Gold since mid-November. As per the latest data, net longs in gold stand at 731 tonnes as against 882 tonnes a fortnight ago. Thus, speculative positions seem to move away as price declines.

Although as prices remained weak, the net flows to the gold ETFs (exchange traded funds) have stayed positive for the last two weeks. That is, cumulative net inflows in the past couple of weeks stands at nearly 20 tonnes as per the World Gold Council (WGC) data. This is largely due to considerable inflows in the North American region. Investors seem to be capitalising on falling price to raise their exposure to the yellow metal. If this trend continues, this can give an upward push for gold price.

MCX-Gold (₹47,903)

MCX-Gold futures (February contract) began the week with a gap-up at ₹48,184 versus previous week’s close of ₹47,960, but failed to get a strong follow-through rally. Bears were quick to respond, and the contract fell and registered a fresh one-month low of ₹47,350 on Thursday. However, there was a recovery on Friday and thus, the contract ended the week with a minor loss of 0.1 per cent at ₹47,903.

So, the broad range of ₹47,000 - ₹49,000 stays valid. But within this range, the contract seems to be largely held within ₹47,400 and ₹48,500. The direction through which the futures breakout of this range can signal the potential price swing. A move above ₹48,500 can turn the sentiment positive. In this case, it can be expected to rally past ₹49,000 and touch ₹50,000. Resistances above this level are at ₹52,500 and ₹54,000. On the other hand, if the contract slips below ₹47,400, sell-off can intensify. This might drag it down to ₹46,500 and possibly to ₹45,920 – a crucial support. A breach of this level can turn the medium-term trend bearish.

Hence, traders can stay on the side-lines given the prevailing conditions and initiate fresh trades along the direction of the break of the price band of ₹47,400 - ₹48,500.

Go long if gold futures rallies above ₹48,500 with initial stop-loss at ₹47,700 i.e., just below the 50-day moving average (DMA). When the contract reaches ₹49,500, revise the stop-loss to ₹48,500. Exit at ₹50,000 as this can be a hurdle. Depending on how the contract reacts to this level, further trades can be planned later.

Alternatively, if contract drops below ₹47,400, go short with stop-loss at ₹48,500. When the price declines to ₹46,500, revise the stop-loss to ₹47,400. Liquidate the positions at ₹45,950.

MCX-Silver (₹61,516)

Silver was weaker than gold and lost 2.3 per cent last week by closing at ₹61,516. The silver futures (March series) has decisively broken the support at ₹62,500 which can now pave way for more downside. Bearish outlook is corroborated by the relative strength index (RSI) and moving average convergence divergence (MACD) on the daily chart as both have fallen to their respective negative territory.

Moreover, the number of outstanding open interest (OI) of all active futures contract on the MCX has increased to 13,210 contracts compared to 11,581 contracts by the end of the preceding week. A drop in price along with increasing OIs indicates a short build-up.

A recovery from here will be resisted by the barriers at ₹62,500 and ₹64,000 – the 50-DMA. A breakout of ₹64,000 can turn the near-term outlook positive wherein the contract can possibly rise ₹66,200.

On the other hand, the nearest supports can be seen at ₹60,000 and ₹58,700. Subsequent support can be spotted at ₹57,800 and notably, a breach of this level can turn the medium-term trend bearish. Since ₹57,800 is a significant support, this might arrest decline and there might even be a corrective rally from here. Thus, given the circumstances, one can only consider short-term trades.

Considering the above factors, traders can sell silver futures at current level of ₹61,516 and add more shorts if it rallies to ₹62,500. Keep the stop-loss at ₹64,350. When the contract declines to ₹60,000, shift the stop-loss down to ₹62,000. Exit the positions completely when price drops to ₹58,000.

Published on December 04, 2021

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