Derivatives

Will gold continue its rebound?

Akhil Nallamuthu | Updated on April 03, 2021

Breakout of ₹45,700 is key and when this occurs, RSI and MACD signals might enter positive zone

Bullion suffered a sell-off in the first half of the truncated week but made a good recovery in the second half, helped by softening US yields and the dollar index. Both gold and silver took back all the lost ground thereby ending the week flat.

The rise in treasury yields for the past several months has been acting as a big dampener for bullion bulls as interest income, in addition to safety, gives treasuries an edge. As yields rose, the demand for the dollar-denominated assets went up - the combination of these two factors keeping bullion prices in check.

While this trend has not entirely reversed, treasury yields are pausing over the last two weeks. The US 10-year yield barely changed and ended the week at 1.68 per cent whereas the dollar index closed almost flat at 92.87. If this trend continues, a correction if not a reversal can occur in both yields and dollar which can be conducive for bullion. If the Covid situation worsens, that would be favourable for both gold and silver to make a comeback.

On the Multi Commodity Exchange (MCX) of India, gold futures (June expiry) ended at ₹45,418 (per 10 grams), marginally higher against the preceding week’s close of ₹45,111. Silver futures (May expiry) ended marginally higher at ₹65,089 (per Kg) compared to ₹64,805 – its preceding week’s close. In dollar terms, gold wrapped up the week at $1,730.1 an ounce; it barely changed compared to the previous week. Silver ended at $24.79 an ounce as against the preceding week’s close of $25.04.

MCX-Gold (₹45,418)

The June futures contract of gold on the MCX began the week on a weak footing and witnessed a decline in the first two sessions.

The contract slipped below the prior low of ₹44,386 and marked a fresh low of ₹44,108, creating the possibility of a sharp fall. The price drop followed by a consolidation followed by a breakdown was clearly bearish and so, the stage was set for the bears to run berserk.

However, there was a quick shift in the direction towards the end of the week and the contract rebounded sharply backed by considerable volume. While it might not be a bullish reversal yet, it is an indication that there is substantial buying interest at current price levels.

Notably, the price has crossed over the 21-day moving average (DMA) – a positive signal.

Moreover, indicators like the relative strength index (RSI) and the moving average convergence divergence (MACD) on the daily chart are showing uptick and the average directional index (ADX) is showing that the recent rally might form the base for a potential uptrend from here.

However, there is no bullish reversal confirmation and the contract has hurdles to cross to establish an uptrend. A breakout of ₹45,700 is key and when this occurs, the RSI and the MACD indicators might enter the positive terrain. Traders and investors can consider buying if the prices get past the resistance at ₹45,700. Subsequent resistances are at ₹47,000 and ₹48,250. On the downside, the price band of ₹44,000 and ₹44,400 has formed a strong base.

MCX-Silver (₹65,089)

The support at ₹65,000 faced a strong test last week as the May futures contract of silver extended the decline in the early part of the week. Like gold futures, silver futures faced downward pressure during the first part of last week which was quickly overturned. It recovered in the second half after registering an intraweek low at ₹62,500 and the contract managed to close above the crucial base of ₹65,000.

Even though the support at ₹65,000 is relevant, it cannot be taken as a confirmation of a bullish reversal. The daily RSI is in negative region and the slope of the MACD indicator on the daily chart remains negative. The ADX shows that the bulls have more ground to cover before exerting dominance over the bears. The price is still below 21-DMA.

Given the above factors, traders and investors can hold back fresh positions until the contract exhibits solid signs of a trend reversal. While the nearest resistance is at ₹66,700 (the 200-DMA), for the trend to turn positive, the contract should invalidate the resistance at ₹68,000.

The support at ₹65,000 is very critical and a decisive breach of this can give a significant blow to the bulls. Supports below ₹65,000 are at ₹62,500 and ₹60,000.

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Published on April 03, 2021
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