Silver drops to 10-month low on sluggish demand

Hits Rs 49,000 a kg in early trade, lowest since February; traders expect further decline.

Silver fell to a 10-month low, at Zaveri Bazar, on poor industrial offtake. Scared retail consumers also abstained from taking fresh deliveries, amid expectation of a further decline in prices, in case the rupee strengthened.

The white precious metal, hit Rs 49,000 a kg on Thursday, in early afternoon trade, in the local physical market. This was the lowest since February 18, while the metal recovered later, to close at Rs 49,140 a kg. On the Multi Commodity Exchange (MCX), it closed at Rs 48,903 in March, a decline of 3.42 per cent from its earlier price. During the session, it plunged to the level of Rs 48,562 a kg.

Open interest in MCX silver contracts has been rising steadily for the last four days, from 523,320 lots on December 24 to 594,740 lots on December 28. Ajay Kedia of Kedia Commodities said, “Rising open interest indicates traders are building short position in silver, expecting prices to fall further.”

Silver’s slump in the domestic market was guided by the decline in the global market, where it plunged to hit a year’s low in early London trade. Silver hit 13-month low intraday, in London, and touched $26.46 an oz, the lowest since November 17, 2010, as the euro zone debt crisis slowed credit and prompted investors to switch to safer assets including the greenback.

“Physical traders are currently holding on to their purchases anticipating further fall in prices in terms of the rupee. The benefit of global fall has not been fully reflected due to the rupee’s depreciation in the last one year. Hence, retail buyers are awaiting some measures from the Reserve Bank of India which may pull the price,” said Suresh Hundia, director of Bombay Bullion Association (BBA), the premier trade body.

“Consumers are waiting for silver to decline to Rs 44,000 - 45,000 a kg, which is possible if the rupee starts moving upwards. Until the global manufacturing sector revives, further decline cannot be ruled out,” said Lalit Jagawat, proprietor of Nakoda Bullion.

The rupee has weakened against the dollar by around 20 per cent this year (53.06 on Thursday) which kept the metal up in Indian currency.

Manufacturing activity in the largest metal consumer — China — is estimated to contract again in December, suggesting the world's second-largest economy is finishing 2011 on a weak note.

According to Rahul Mehta, managing director, Silver Emporium, one of the largest producers of silver artifacts and silverware, “Traders are booking profit to cover the loss in other asset classes including equity and currency. This is holding the all precious metals down. The metal is expected to remain under pressure on the back of dollar strength and risk aversion in the markets.”

Currently, bullion dealers are selling silver with a discount of Rs 500-600 a kg.

Meanwhile, the gold to silver price ratio trading also indicates silver has weakened, and the sharp fall could lead to further decline.

Kedia added, “From 51.70 on December 1, the gold/silver ratio shot up to trade currently at 57.31, after making a monthly high of 58.15, early this week. This indicates weakening of silver against gold. The ratio can touch the 60 level soon.”

Spot gold followed silver and declined three per cent to close the day at Rs 26,570 per 10g against the previous close of Rs 27,415 per 10g.