The bull run in gold and silver
, now more than five years old, is slowly coming to a halt. This year, gold prices have risen just 1.77%, from 30,631 on January 1 to Rs 31,174 on October 29. Silver has fallen 14%; it was at Rs 48,912 per kg on October 29 as against Rs 57,172 on January 1.
The reasons are fears over drying up of liquidity as the US Federal Reserve, or Fed, tapers its liquidity injection programme, and rising stock markets. Both these have the potential to reduce the flow of money into these safe havens.
Also, lower liquidity as a result of the Fed action will bring down inflation, and thus reduce the attractiveness of gold as a hedge against price rise.
6.53 per cent
IS THE AVERAGE RETURN GIVEN BY GOLD EXCHANGE-TRADED FUNDS IN THE SIX MONTHS TILL 31 OCTOBER 2013
Market analysts say the upcoming wedding season
and supply crunch due to import curbs could support these precious metals till March 2014. In order to discourage gold imports to control the ballooning current account deficit, the government had, a few months ago, linked shipments to re-exports and increased taxes on overseas purchases.
Gold had given 22.8%, 23%, 31.5% and 12% returns in 2009, 2010, 2011 and 2012, respectively. Silver had risen 47%, 72%, 8% and 13%, respectively, during these years.THE STORY SO FAR
In the first half of 2013, gold and silver fell 16% and 29%, respectively, to Rs 25,778 per 10 grams and Rs 40,408 per kg, respectively. However, they rose 20.75% and 21.4%, respectively, in the August-October period.
"Expectations of Fed taper drove world markets into a cautious mode as that would have impacted commodities denominated in dollars. Also, investors were not only moving away from higher-yielding riskier investments, but were also selling gold. The sharp drawdown in gold ETFs (exchange-traded funds) also weakened sentiment," says Naveen Mathur, associate director, commodities and currencies, Angel Commodity Broking.
On the investment front, the developments did not augur well for the bulls. Gold ETFs like SPDR Gold Trust, the world's largest gold ETF, saw persistent outflows, with holdings dwindling to 880 tonnes from 1,350 tonnes at the start of the year.WAY AHEAD
Indians have a tradition of buying gold
on auspicious occasions. That's why demand may rise in the coming wedding season. According to market experts, there is a supply crunch in gold and, therefore, it is trading lower in the futures market than in the cash market, which is rare.
DK Aggarwal, chairman and managing director, SMC Investments and Advisors, says, "This year, we expect some increase in buying in the wedding and festive seasons, but it may be limited to some extent."
During this Navratri, sales of gold and silver jewellery failed to pick up. However, experts are upbeat for a slightly longer term. Tarun Satsangi, head, commodity and currency research, Globe Commodities, says, "Supported by the upcoming wedding season and the supply crunch, we see gold prices at Rs 32,000 per 10 grams in the next four months. Silver will also move in tandem with gold and can touch Rs 53,000 a kg."
Kunal Shah, head, commodity research, Nirmal Bang Commodities, is also bullish on these metals. "Due to the delay in QE tapering, we may see gold at Rs 31,500 per 10 gm and silver at Rs 52,000 per kg by the end of December 2014. But once the US economy starts improving, tapering expectations will lead to a correction."FACTORS TO WATCH
There are various factors to be considered before investing in gold and silver as extreme volatility can sometimes wipe off the margin in the futures market. So, investors should use proper risk management techniques to safeguard their investments.
Factors such as demand & supply, geopolitical tensions and policies of governments and central banks should also be considered. For instance, rupee movements impact these metals in a big way, as they are imported and priced in dollars.
"One must track the rupee movement. Over the year, we have seen that sharp increases in gold prices in India have been supported by a weakening rupee," says Mathur of Angel Commodity Broking. This year, till October 29, gold prices have fallen 15% in dollar terms, while they have risen 1.8% on India's Multi Commodity Exchange. The reason for the disparity is the sharp fall in the value of the rupee against the dollar, which makes imports expensive in rupee terms. India imports all the gold that it consumes.
Aggarwal of SMC Investments and Advisors says, "In the international market, the roller-coaster ride of the greenback, buying by central banks and physical and ETF demand are the factors that must be closely watched."IMPORT-EXPORT
After almost two months, the government has removed some restrictions on gold imports.
Hitesh Jain, analyst, commodities, IIFL, says, "We expect import demand to improve during the last quarter of the calendar year. However, import numbers in October-December will still be less than in the corresponding period of last year. We see imports of 150 tonnes during the last quarter of 2013 as against 255 tonnes in the same period a year ago."
While gold imports have fallen, silver imports have risen sharply.