Gold bullion traded down by 3.18% in the last week to settle at $1268.20. At the domestic market, December futures for the current contract ended at Rs 28,365, down by 2.50%. Although the rupee traded on a stronger note by 0.60% and settled at 61.08 per dollar, the effect of the currency appreciation was not visible on local gold prices. As of 11th October 2013, spot prices at the local market for 10 grams were quoted at Rs 29,832, down by a mere 1-1.5% from its previous week’s close unlike the futures contract price performance. The primary reason for gold prices trading down in the last week was the US government’s flimsy decision on the debt ceiling, which continued to weigh on all the financial asset classes as well as gold. Even after 11 days, the US is still facing a partial shutdown but, there have not been any complete developments yet and, investors across the globe are reluctant to trade. Therefore, the trade participation have also come down. From the derivatives market, gold futures, which fell over 3% in the last week was less supported by the volume. The aggregate trade volumes were down by 30% from its previous week’s trading volume. However, there has been a slight recovery in the aggregate open interests as the same was trading below a 4-year average. This indicates that the market had now embraced the bearish view on gold and, it is likely that in the near term that gold bullion will drop. At the local futures market, prices along with volumes and open interests have increased, suggesting that the market will remain lower in the next week. The real investment demand has also declined as investors are still cautious in trading gold. The gold holdings at the SPDR ETF have declined to 890.98 tons from 899.99 tons. We believe that as long as the uncertainties prevail in the market, the investment demand may also remain lower and by which prices may also remain lower. Gold is heading for the first annual loss since 2000 and the biggest decline since 1981, as some investors lost faith in the precious metal as a store of value amid concern that the Fed may slow the pace of its $85 billion monthly bond purchases in the near future. Coming to the most discussed topic, the partial shutdown of US may continue to be a concern in the next week and still there is clarity on the debt ceiling decision because of which the market remain panicked and commodities prices, especially gold may remain lower. In the meanwhile, the economic data from across the globe are looking negative. To begin with, the US economic data may show slight negativity along with European data while Asian economic releases may remain mixed. However, we believe that the European economic data might turn more bearish than other economic numbers in the next week and because of which the euro, which is holding up near $1.3550 might decline. This might keep gold prices lower. At the domestic front, the rupee may continue to appreciate, which will further help local gold prices trade down. Looking at the above scenario, we believe that gold bullion may continue to trade down in the next week while we recommend selling from the higher levels.
This Week Strategy:
1) Stay short in the futures contract at the MCX and COMEX platforms
2) Calendar spread at MCX platform: Buy near month and sell far month
Silver prices traded down last week. December silver futures prices at the COMEX platform traded down by more than 2% and settled at $21.25. Likewise, at the local market, the silver futures contract has declined by more than 3%. Unlike gold, silver prices have respected the local currency’s appreciation and therefore, Indian silver prices have fallen more than global silver prices. As stated in our economic analysis and in the gold report, silver prices fell due to ongoing concerns looming in the US economy. In the meanwhile, silver prices also declined, supported by the weakness in the entire precious metals group, barring palladium. The investment demand has also declined in silver. The holdings at the I-share ETF backed by silver have declined from 344450 to 350450 tons. The month-till-date silver holdings have been in the negative by 1.13%, indicating that the demand is still low in the global silver market. Another important aspect that we have noticed is the gold and silver price performance, which is currently divergent and likely to continue in the same vein. Therefore, we also suggest a ratio trading strategy. In the last week, silver outperformed gold as the former declined less than the latter, supported by the higher equity indices across the globe. We expect the scenario to remain the same in the next week and because of which the fall in silver prices could be minimal. At the domestic market, silver dropped to a nearly two-month low to retrace Rs 48,000 per kg on a huge selloff and no demand at the physical market. Since gold imports are restricted in India by the government, there has been good import for Silver. Indian silver imports are at a record high so far this year as the prices are trading low. Fact: According to the GFMS metals consultancy, India imported 4,073 tons of silver from January to August, more than double the 1,921 tons in the whole of 2012, when a jump in prices in the peak season hurt demand. The record high was 5,048 tons in 2008.Finally, as discussed in detail about the economic data in our global economic analysis; we believe that the industrial activities are likely to be less impressive for the respective economies and by which silver prices might remain under pressure. In the meanwhile, the rise in equity markets across the globe and slight improvement in base metals might also restrict the fall in silver prices. Looking at the overall scenario, we expect silver prices to remain lower. However, the fall in silver prices could be minimal in comparison to the gold.
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