Will gold stage a turnaround after two consecutive weekly drops?

Improved retail sales numbers in the US reignited the policy normalisation debate, leading to a strong dollar which pulled down bullion prices considerably last week.

Gold and silver fell for the second straight week despite a minor recovery on Friday.

In dollar terms, gold lost 1.8 per cent and silver lost 5.6 per cent and closed at $1,755 and $22.4 per ounce.

On the Multi Commodity Exchange (MCX), gold futures slipped 1.8 per cent and silver futures tanked 5.7 per cent last week.

Gold October futures and silver December futures ended the week at ₹45,986 (per 10 grams) and ₹59,992 (per 1 Kg), respectively.

Nevertheless, traders seem to be retaining long positions as indicated by the CFTC’s (Commodity Futures Trading Commission) COT report – net longs as on Tuesday was at 672.8 tonnes, unchanged from prior week.

On the other hand, there are some supportive factors.

The latest World Gold Council data shows the all-in sustaining costs for gold rose for 3rd straight quarter. This is due to appreciation in the currency of largest gold producers such as South Africa, Australia, and Canada against the dollar.

On the demand front, a WGC study shows that the wholesale demand for gold in China tends to increase in August and September.

However, one should keep a close watch on the outcome of the Fed meeting and FOMC economic projections coming Wednesday, which can have a significant impact on bullion prices for the near-term.

MCX-Gold (₹45,986)

Gold October futures, which saw an uptick during the early part of last week, reversed the direction mid-week. The contract faced 21-day moving average (DMA) resistance at ₹47,250 from where the trend turned downwards. Consequently, it broke down from the support of ₹46,800 and marked an intraweek low of ₹45,812 before wrapping up the week a little higher at ₹45,986.

Although the futures is just around the key level of ₹46,000, the price action indicates considerable weakness. This is supported by how indicators like the relative strength index (RSI) and the moving average convergence divergence (MACD) have moved over the past week. The former, which was in bearish territory, is showing a fresh downtick with the bearish momentum picking up. The latter, which has been charting an upward slope since mid-August, is now pointing downwards. The average directional index (ADX) too is showing bears are gaining good traction. Besides, the number of outstanding open interest (OI) went up during the past week i.e., on Friday it stood at 16,559 compared to 15,240 in previous week end.

While the above symptoms are clear signs of fragility, the contract has a support band between ₹45,660 and ₹46,000. Traders can initiate fresh short positions if the contract falls below ₹45,660. A breach of ₹45,660 can result in the price swiftly correcting to ₹45,000 and then possibly to ₹44,200. But if there is a recovery, the futures can face barriers at ₹46,800 and ₹47,600.

MCX-Silver (₹59,992)

Silver futures (December expiry) saw a quiet opening last week and it remained dull during the first half of the week.

But the contract saw a sharp fall in the second half and closed the week with a loss of 5.7 per cent. Most of the decline happened on Thursday.

The contract has broken down from its range and the price action on the daily chart – a downtrend followed by a consolidation period followed a break down – is a bearish indication. The contract has been forming lower highs and lower lows since June, showing that bears are in the driving seat.

With the latest event of a support being taken out, the contract may see another leg of downtrend.

Corroborating this, the RSI, which has been moving down gradually since past two weeks, has extended the downward movement; the MACD on the daily chart has now made a U-turn towards south and on the weekly chart it continues to show strong bearish momentum.

The break down occurred with significant volume and the number of outstanding OI of all active silver futures on the MCX has gone up significantly to 14,470 as against 10,918 at the end of the preceding week.

Considering the prevailing price action, the short- and the medium-term trend will stay bearish as along as the price remains below ₹65,000 and the 50-DMA, which currently lies at ₹65,600.

So, traders can take bearish view and consider shorting silver futures. The contract, now hovering around ₹60,000 is likely to soften to ₹58,000. The sell-off can intensify if price remains below ₹60,000. In this case the contract can touch ₹56,000.

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