Growing anticipation of the Fed closing the liquidity tap only got stronger following last week’s Federal Open Market Committee (FOMC) meeting. Economic projections saw positive revisions, and the dot plot hinted that the rate hike might be coming sooner than expected. This sent the dollar upwards last week and the dollar index posted a weekly gain of about 1.8 per cent – the highest in the last nine months.
Dollar strength drove the prices of bullion lower and the pace of the fall was fast and quick. Treasury yields also jumped weighing on bullion. While yields did scale back, bullion remained weak through the week.
Hence, gold and silver lost 6 per cent and 7.5 per cent as they closed at $1,763.3 (per ounce) and $25.79 (per ounce) on Friday.
As the rupee depreciated against the dollar, the decline rupee terms was comparatively lower. That is, gold futures on the Multi Commodity Exchange (MCX) ended at ₹46,728 (per 10 grams), falling 4.4 per cent. Silver futures wrapped up the week with a loss of 6.4 per cent, closing at ₹67,598 on Friday.
While higher inflation and the consequent rate hike can hurt riskier assets such as equities, bullion can recover in the long run because of its safe-haven status and being a classical hedge against inflation.
On the supply side, there is a drop in gold mine production for second year in a row, the World Gold Council (WGC) data showed. The production in 2020 stood at 3,478 tonnes as against 3,597 tonnes in the year before. But this is largely due to the shutdown in operations because of the pandemic. Going ahead, the output may increase which can put a cap on the price this year if it drastically rises.
MCX-Gold (₹46,728)
The gold futures on the MCX witnessed a wave of selling last week which dragged the contract lower resulting in it breaching the lower boundary of the range i.e., the support at ₹48,600.
Therefore, the price band of ₹49,800 and ₹50,000 continue to stay as strong hurdles and prolonged consolidation at these levels gave room for the bears to grow slowly before making considerable impact. The contract has fallen below both 21- and 50-day moving averages and the sell-off has occurred with significant volume.
Not only price action, indicators like the relative strength index (RSI) and the moving average convergence divergence (MACD) on the daily chart have turned bearish.
While the former has slipped into the bearish zone, the latter has been moving down and is on the verge of entering negative zone.
The average directional index (ADX) show that the bears have become stronger than the bulls over the past week. Moreover, the number of outstanding open interests of all active futures contract have gone up to 14,599 from 13,840 a week ago.
A fall in price along with increase in open interest in a bearish signal.
As the contract has invalidated key support levels and indicators show bearish signals, traders can short the contract for short-term. Rather than fixed stop-loss one can maintain a dynamic stop-out level.
That is, the initial stop-loss can be at ₹47,800 and start shifting it downwards with a gap of 1.5 times the daily average true range (ATR) level as and when the price declines.
On the downside, the nearest support can be ₹45,700 below which the futures can touch ₹44,600.
MCX-Silver (₹67,598)
The sideways trend in silver futures since the beginning of May until last week, went for a toss as sellers took charge of the proceedings last week. Thus, July futures moved out of the consolidation range of ₹70,000 and ₹72,800 as the contract broke below the crucial level of ₹70,000 with substantial volume.
Importantly, the price has slipped below 50- and 200-DMA, potentially hinting that the bears are set to stay for considerable amount of time and unless the contract is pushed back above ₹70,000, silver futures is a technical sell candidate. Bearish outlook is also exhibited by the RSI and the MACD since both are now in their respective bear territory. The ADX on the other hand indicates that the downtrend is building good amount of momentum. Also, the number of outstanding open interests have increased to 15,058 from 12,975 over the past one week, which is a clear indication of short build-up.
Given prevailing conditions, the likelihood of silver futures declining seems high and therefore, one can consider opening fresh sell positions at the current levels. Instead of a fixed stop-loss, a dynamic stop-loss is recommended to lock-in a certain level of profit as the price drops. While the initial stop-loss can be at ₹70,000, consider moving it down along with the trend at a distance of 1.5 times the daily ATR level. Immediate support can be spotted at ₹66,000. Yet, the contract is likely to head towards the subsequent support at ₹65,000.