Derivatives

Further decline in futures likely 

Bullion extended declines last week as gold and silver in the international spot market lost 3.8 and 5.8 per cent to close the week at $1,811 and $21.07 per ounce, respectively. Similarly, on the Multi Commodity Exchange (MCX), the near month gold and silver futures dropped 2.8 and 5.1 per cent as they closed at ₹49,873 (per 10 grams) and ₹59,332 (per kg), respectively. Thus, both the precious metals have depreciated for four straight weeks and the downward momentum does not seem to have waned.

The major contributor to the woes of these metals is the US dollar, which continues to appreciate. On the other hand, China’s zero-Covid policy is impacting the demand from the country, which is the largest importer. These factors outweigh the benefits from elevated inflation. Speculators seem to be discouraged by the uninterrupted drop in price and they are unwinding the long positions. The net longs on the COMEX have been on a decline for the past one month i.e., it stood at 617 tonnes on May 10 compared to 884 tonnes on April 12. So, going ahead, the picture is not very rosy for the precious metals.

MCX-Gold (₹49,873)

Facing resistance at ₹51,300, the June futures of gold on the MCX declined last week and on Friday, it slipped below the important level of ₹50,000. This has turned the near-term outlook bearish, and the bears are now dictating the terms. But noticeably, there is a support band between ₹49,200 and ₹49,350.

However, given the current momentum, the likelihood of this being breached in high and we could the fall extending to ₹48,000 – a support – in the coming week. Subsequent support is at ₹47,000. There could be a bounce of this level. Whether that will be a bullish trend reversal or a just corrective one will have to be seen later.

Hence, traders can go short on gold futures. That is, short now and add more shorts when price moves up to ₹51,000. Place initial stop-loss at ₹52,200. When the contract falls below ₹48,000 tighten the stop-loss to ₹49,200. Book profits at ₹47,000.

Go Short

Traders can go short on gold futures and add more shorts when price moves up to ₹51,000, with initial stop-loss at ₹52,200

MCX-Silver (₹59,332)

Silver underperformed gold last week and it closed below the key support of ₹60,000. It is currently hovering just above the bottom of the range of ₹58,000-74,000, within which it has been fluctuating since August 2020. Thus, ₹58,000 is a substantial support.

So, even though the trend is now bearish, traders can wait for now and initiate short if ₹58,000 is breached. Place stop-loss at ₹60,000. Below ₹58,000 the contract can swiftly drop to ₹55,000 and probably to ₹52,000. When price dips below ₹55,000 book 50 per cent of the shorts and alter the stop-loss to ₹58,000. Exit the leftover at ₹52,000.

Published on May 14, 2022