Derivatives

Will gold bulls continue to outfox bears?

Akhil Nallamuthu BL Research Bureau | Updated on June 05, 2021

A breach of ₹50,000 level can induce more power to the uptrend wherein the futures can swiftly rise to ₹51,000

Gold is an important component of central bank reserves across the world and when they add more of it to their reserves, it can positively impact the price for two reasons. One, the quantity can be large and two, it induces positive sentiment.

The World Gold Council (WGC) released the latest monthly central bank statistics for April. As per the initial estimate, central banks added a net 69.4 tonnes and gross purchases of 74.1 tonnes were almost entirely by five central banks, the largest being Thailand (added 43.5 tonnes). Notably, India did not add or off-load gold to or from its reserves in April. Although net buying was lower than the 184.6 tonnes in March, it stayed positive for two months in a row. A continuation of this trend can support the price of the yellow metal.

But mid-last week, the dollar strengthened following the release of non-official jobs data which predicted better-than-expected employment numbers. This led to a sharp decline in the bullion where gold, in dollar terms, recorded its biggest single day fall in over three months as it lost nearly 2 per cent on Thursday.

Similarly, silver recorded it's biggest single day decline in the last two months by depreciating 2.7 per cent on Thursday. However, official data released on Friday showed lesser strength in the US labour market than expected. Bullion recouped some of its losses on Friday.

In dollar terms, gold ended the week with a loss of 0.7 per cent by closing at $1,890 on Friday and silver closed the week flat at $27.78 (per ounce). In the domestic market, gold futures (August expiry) on the Multi Commodity Exchange (MCX) ended on Friday at ₹48,994 (per 10 grams), whereas silver futures (July expiry) closed at ₹71,539 (per Kg). Both were largely flat on weekly basis.

MCX-Gold (₹48,994)

The futures contract of gold on the MCX had a muted week even though it marked a fresh five-month high of ₹49,721 on Wednesday. But triggered by a sudden up-move in the dollar, gold prices started to fall and the contract slumped on Thursday. However, support at ₹48,600 was strong enough to arrest this fall and with the backing of this support, bulls tried to push prices up on Friday. They were able to recoup the losses which resulted in futures ending almost flat at ₹48,994 compared to the preceding week’s close of ₹49,150.

Since the contract has sustained above ₹48,600, the trend is inclined to the upside and the price has stayed above both 21- and 50-day moving averages (DMAs). The indicators viz. the relative strength index (RSI) and the moving average convergence divergence (MACD) on the daily chart, despite showing some weakness following the fall, remains in the positive territory. Also, the average directional index (ADX) shows that bulls are stronger than the bears. These factors indicate that the trend has not reversed downwards, and the uptrend is likely to pick up momentum in the coming days.

Taking these factors into consideration, one can maintain a bullish bias and go ahead for fresh buys. From current levels, the nearest roadblock can be at ₹50,000 – a critical level. A breach of this level can induce more power to the uptrend wherein the futures can swiftly rise to ₹51,000. Support at ₹48,600 can be expected to stay valid. Subsequent supports are at ₹47,650 and ₹47,000.

MCX-Silver (₹71,539)

The July futures contract of silver on the MCX, which has been charting a sideways trend for the past one month, briefly dipped below the lower boundary of the range at ₹70,000. However, sellers were not able to drag down the contract much as the contract recovered after registering a low of ₹69,800. Incidentally, the 50-DMA, which has been rising over the past couple of weeks, coincided at ₹70,000 proving to be a strong base. Nevertheless, as the contract wrapped up the week at ₹71,539, it still remains within the range of ₹70,000 and ₹72,500 and so, the trend remains unclear.

While RSI has stayed largely flat for the past one month, the MACD has been slowly heading downwards during the past couple of weeks. The price staying below the 21-DMA and the ADX shows that bears are stronger than bulls currently.

Whatsoever, the next leg of trend cannot be predicted so long as the contract hovers within the horizontal price trend and the direction of break can lend us some clue. Solid breakout of ₹72,500 can turn the trend bullish and the contract might rally to ₹75,000. Past this level, it could even touch ₹77,500. On the other hand, a break below the support at ₹70,000 could attract more bears and can drag the price lower to ₹68,000.

Published on June 05, 2021

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