Gold expected to see modest rise after flash crash of 2013

 

 MUMBAI: Once accumulated as wealth by families to tide over rough times, gold has been reduced to a trading commodity. In the last few days, prices have plunged to register its biggest loss in more than three decades.

Gold prices have declined nearly 20 per cent while silver is down 23 per cent in 2013. International insiders report that four major fund houses shorted the commodity, which led to sharp declines on Friday, only to be followed up in Asia. The selling soon got out of control as margins and stoploss triggers came into play.

The gold prices have now officially entered the bear market with more than 20 per cent decline since its record highs above $1,900 in 2011 end.

Indian gold prices have declined less as the fall is cushioned by weakness in the Indian rupee. But here too, the prices have come off the record highs of nearly Rs 33,000 in 2011 to Rs 25,500 per 10 gms today. Gold prices in India hit a 19-month low while silver was at 26-month low and trading below Rs 44,000 per Kg.

The decline in gold led to Indian jewellery and bullion traders lowering shutters due to sharp decline in prices as they incur losses on holding stocks. The sellers are awaiting stability in prices before they quote prices.

In India, wedding season and Akshay Tritiya on May 13 are major buying events, which are expected to lend support to falling prices. Gold prices have seen some rebound from Boston bombings and war rhetoric from North Korea.

The forecast for gold is a difficult one to make right now. Most market analysts and participants feel that 2013 now will go down as a corrective year for precious metals and consolidate for a couple of years with modest gains.

The safe haven buying into the metal has been weak on inflation concerns and hopes of pick-up of growth in the US. While the economic growth data has not been consistent, but it has been getting better, leading to money flowing in equities. Another factor that led to onslaught on commodities was the lower than expected China growth data.

There are reports that Cyprus may be selling 12.5 tonnes of gold. Though the quantity is less than a weekly consumption in India, there is a fear that other EU countries with higher gold reserves could come into the market for sales.

There are also reports of Merril Lynch selling 4 million ounces on Comex which collectively led to decline in prices. To add to it, there has been a bearish gold report from Goldman Sachs that pushed buyers on sidelines. An opportunity selling that turned into panic selling and is now termed as Flash Crash.

The trading margins have increased across at Comex, Shanghai and Indian MCX as well and trading volumes have hit record highs on India's MCX and COMEX in US.

It augurs well with the Indian government which has been trying to discourage gold buying due to its impact on the current account deficit. India, China and much of Asia continue to be big buyers of gold. 

 

ADITYA KUMAR SINGH

PGDM 2 SEM