Cooling off after being overbought

After a strong performance in March, precious metals took a breather last month. The Comex gold price scaled a 52-week high in mid-April but closed marginally lower at the end of the month.

The Comex gold price edged past the psychological $2,000-mark in April but has recently receded below this level.

In the month of April, Comex gold gained 0.65 per cent to end the month at $1,999.1 per ounce. Comex silver posted a healthier gain of 4.4 per cent to settle at $25.23 at the end of April.

Mirroring the trend in the global markets, MCX gold posted a marginal gain of 0.5 per cent to settle at ₹59,919 per 10 grams. MCX silver closed 3.1 per cent higher to the end of April at ₹75,419 per kilogram.

The strength in Comex gold price in the early part of April helped the yellow metal go well beyond the target zone of $2,025-$2,030 mentioned in April. Comex gold touched a high of $2,063 on April 13 and has since cooled off a bit.

Mean reversion

The recent cool-off in price suggests that the gold price is in the midst of a mean-reversion move. The strong rise in recent weeks had pushed the price into an overbought zone and the recent price action suggests that a cool-off phase is in progress.

The short-term outlook for Comex gold is moderately negative and the price could drop to the $1,940-$1,950 zone. The medium-term outlook remains positive, and the price could resume the uptrend on the completion of the current cool-off phase. Similar to gold, Comex silver also hit the target zone of $25.5-$26 mentioned last month.

After recording a high of $26.2 on April 14, the price of Comex silver has pulled back in the last couple of weeks. The recent cool-off in silver is likely to continue and the price could drop to the support zone of $23.5-$24. This view would be invalidated if the price moves above $26.5.

In the domestic market, MCX gold achieved the target of ₹60,400-61,000 mentioned last month. The recent price action suggests that MCX gold price could remain subdued in the next few weeks. A drop to ₹57,600-58,000 appears likely. A move above ₹61,500 would invalidate this view.

Silver may slip

MCX silver also hit the target zone of ₹72,000-72,500 mentioned last month. The short-term outlook for silver is mildly negative and the price could drop to ₹72,500-73,000 zone. A move above ₹79,000 would negate the case for a fall to ₹72,500-73,000 zone.

To summarize, the precious metals have reached an overbought zone and a mean reversion or cool-off can occur. The overall trend, however, remains positive.

The uptrend is likely to resume on the completion of the anticipated short-term cool-off in price.

(The author is a Chennai-based analyst/trader. The views and opinions featured in this column are based on the analysis of short-term price movement in gold and silver futures at COMEX & Multi Commodity Exchange of India. This is not meant to be trading or investment advice)

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