Bullion market now in hands of bears

Gold losing glitter, while silver falls to 5-month low, as investors said to be moving towards dollar

After almost a decade, gold has slipped into a bear grip, losing 17 per cent from its all-time high of $1,900 an ounce recorded in September 2011. Silver is down 40 per cent since its all-time high of a year before. Even in the current financial year beginning April, gold has fallen 5.4 per cent, while silver has lost 11.1 per cent so far, not seen since a decade.

Most analysts have started giving bearish calls on gold prices for the short term. “Ever since gold started its phenomenal rally way back in 2001, I have never seen it disrespecting any kind of chart pattern. This is the first time after an 11-year rally that prices are at an exhaustion phase,” said Aurobinda Prasad, head of commodities at Karvy Comtrade.

Today, after JPMorgan declared a loss of $2 billion on synthetic credit securities after an “egregious” failure by its chief investment officer, both gold and silver (along with other commodities) lost further ground. In the international markets, gold was trading at $1,578 an ounce, while silver was trading at $28.6 an ounce. In Mumbai’s Zaveri Bazar, silver was trading near its five-month low of Rs 53,690 a kg, down Rs 800 a kg from yesterday. Gold closed down Rs 60 today at Rs 28,385 per 10g.

Bears are said to be targeting the next support level for gold, at $1,528 an ounce, seen last December. The major reason for gold losing charm is that investors are moving towards the dollar as a safe asset. Said Naveen Mathur, associate director of commodities and currencies at Angel Broking, “Gold has lost its appeal as a safe haven in the last few months, as investors are currently flocking towards the dollar. The euro has also been depreciating and gold has been following equities in the last few months.”

The dollar and gold have traditionally shown an inverse relationship, meaning when the dollar rises, gold falls and vice versa. The dollar is rising; in the past two weeks, the dollar index went up almost two per cent. The euro zone is also passing through political uncertainty, leading to a fall in the euro; if the political crisis in the euro zone seen after elections in major economies persists, the euro may slip further against the dollar.

Suki Cooper, analyst with Barclays Commodity Research, said, “While precious metals are reacting negatively to political uncertainties in Europe, physical demand from major consuming countries like India and China is also not coming.”

Kapoor sees further risks. “Key headwinds remain in bouts of broad risk reduction and dollar strength. The ETPs (Exchange Traded Products) have remained resilient for now, at just under 2,430 tonnes (of physical holdings by all funds). Should this long-term sticky investment turn negative (meaning, if investors begin unwinding their positions or begin booking profits, releasing their holdings), prices could be exposed to significant downside risk,” she said.