Gold plunges 1,500, silver 3,500

Bullion Down 25% Since 2011 Highs Jewellers Anticipate Further Slide

Partha Sinha & Bella Jaisinghani TNN

Mumbai: Unnerved by the prospects of a massive slide in gold and silver prices because of changing market dynamics, bullion investors world over have pulled down prices by more than 25% from their peaks in 2011, indicating that the precious metals are finally in the bear territory after a bull run that lasted more than a decade. In India, gold fell by Rs 1,500 on Monday to trade around Rs 26,500/ 10gm in the Mumbai market compared to about Rs 30,500 at the beginning of the year. Similarly, silver was down Rs 3,500 on Monday to around Rs 47,000/kg, sliding from about Rs 58,000/kg at the start of the year. Talks of troubled Cyprus selling gold worth about half a billion dollars, strength of the US currency with which the yellow metal’s price has an inverse relationship, and a general loss in confidence in the two precious metals by investors because of months of weakness in prices led to the crash, commodity players said.
    In the international market too, gold was trading at around $1,405/oz, down 6.4% on the day while silver was at $23.8/oz, down nearly 10%. Since its peak in September 2011 at around $1,900, gold prices are now down 26% while silver prices have halved from their April 2011 peak at close to $50. A 20% slide in the price of a commodity or a stock from its peak is taken as a signal for it to have entered the bear territory, which often lasts several years.
    “Investor are losing confidence in gold and now the price seems to be heading towards the $1,380 mark,” said Mohit Kamboj, president, Bombay Bullion Association. “Only a weakness in the rupee can stop the slide in gold prices in India, which does not seem plausible now. Since a number of countries are reducing their gold reserves, the future of gold seems bleak,” Kamboj said.
    Commodities brokers said several factors over several months have led to the crash in the prices of these precious metals. Jayant Manglik, president, retail distribution, Religare Securities, says after peaking about 18 months ago, gold prices have not tested that level again, indicating a weakness in its price. Secondly, the US economy has started showing signs of revival, which is strengthening the US dollar that has an inverse relationship with gold prices. “Expectations around the globe that the US Fed may soon bring down the quantum of QE3 soon has also had its impact on gold prices,” Manglik said. Since the global financial crisis, US Fed’s quantitative easing programmes have ensured easy liquidity in the global economy, driving commodity prices higher.
    Besides, the rising rate of interest on bonds also makes these asset classes attractive compared to gold, market players said. “These factors were building over months, but the trigger for the crash was the news that Cyprus may sell gold from its reserves (worth about $500 million) anytime soon. This prompted investors and speculators to offload their positions in the yellow metal,” Manglik said.
    For silver, which follows the yellow metal in the commodities market because of its close correlation with gold prices, the reasons were almost a rub-off. Silver is usually held by investors who don’t have the capacity to hold large positions in gold, and here too investors and speculators are offloading their positions, traders said.
    Another interesting trend that was observed in the Mumbai market on Monday was that while investors rushed to sell their positions in gold and silver, jewellers, who are eyeing the coming festive and wedding seasons including Akshaya Tritiya on May 13 for increasing their sales, were yet to step into the buyers shoes. “They (jewellers) are still expecting the prices to fall, and hence their reluctance to buy,” said Lalit R Jagawat of Nakoda Bullion, one of India’s leading gold importers and traders. Agreed Kumar Jain, vicechairman, Mumbai Jewellers Association. “Next target for gold is likely to be around $1,350 as it will be really difficult to re-gain investors’ confidence,” he said. His advice is not to take a buy position till that level.
    In the international market, bullion appears headed for the biggest two-day fall since 1983 in percentage terms. On Monday, gold tumbled more than 9%, and was down nearly $140 per ouncein late trades on track for its biggest one-day decline in dollar terms, as investors ditched the precious metal en masse in search for better returns in other assets. Gold’s drop triggered a broad-based commodity selloff and was mirrored by a 10% plunge in silver. Platinum and palladium also fell sharply. Bullion’s harrowing sell-off caught many veteran investors by surprise.
    There has been no drastic changes in gold’s supply/ demand picture in the last week although numerous factors have kept gold from rising while investments like US stocks took off. 

 
 WHY THE GLITTER IS WEARING OFF
 

THE BUILD-UP
For several months, factors driving bullion markets around the globe were not favourable to gold...
    After peaking at around $1,900/oz in Sept 2011, gold prices have never regained that level for 18 months, indicating price weakness
    US economy has started showing signs of a revival, strengthening the US dollar, which has an inverse relationship with gold prices; monetary easing in Japan has only added to dollar’s strength
    Expectations that US Fed’s QE3 could be scaled down soon, ending the easy money policy which has driven commodity prices since 2008
    Rising interest rates make bonds more attractive than gold
SILVER MIRRORS YELLOW METAL
    In the long run, silver prices mirror that of gold and the metal is usually held by investors who don’t have the capacity to hold large positions in gold. Silver peaked at about $50/oz in April 2011 and has not regained it in two years. On Monday, it crashed to below $24, down more than 50% from the peak. Here too, investors and speculators are offloading their positions  

THE TRIGGER
    These factors were building over months, but the trigger for the crash was the news that Cyprus may sell gold from its reserves, worth about $500 million. This prompted investors and speculators to offload their positions in the yellow metal 

-TOI