The Hindu Business Line : Gold volatility: Caution required

The bloodbath in the precious metals market (witnessed on Thursday last) is neither the first of its kind, nor is it likely to be the last. Its utility is that it once again provides evidence and reminder, if one was needed, that any market that moves away from the fundamentals and is influenced more by non-fundamental factors is likely to witness sharp correction, sooner rather than later.

The precious metals corrected sharply form their recent peaks with gold down almost 4 per cent, silver down close to 16 per cent and palladium down 6 per cent at close on April 20.

The sell-off is partially attributed to weakness in some other commodity markets including oil. The precious metals were the biggest losers. Many claim the movement was irrational.

GREATER RISKS

Obviously, investors have to exercise caution. There are far greater risks trading in precious metals market now than there ever was. Prices are more speculatively driven and not backed by strong fundamentals.

The day's trade and price movement makes interesting reading.

Opening at $639.3, the metal reached a high of $645.8 and then fell sharply to as low as $607.8 before closing the day at $614.9/oz.

PROFIT TAKING

After jumping above $640 an ounce in the early trades, gold fell sharply thereafter on heavy profit taking, at some point trading more than 6 per cent (or $38) below the day's high.

According to experts, there was no obvious trigger for this sudden retracement. A small recovery in USD/EUR could have dampened sentiment somewhat, but was seen unlikely to have caused the aggressive sell-off. "It is more the result of a market that has moved too much too quickly," said an analyst.

SCOPE FOR LIQUIDATION

While it is natural that there would be buying interest at lower prices, what is important to note is the speculative length that remains substantial. Obviously, there is scope for further liquidation.

FURTHER WEAKNESS SEEN

Technical analysts too see further weakness in the days ahead. A close below $609 would be, it is argued, seen as a blow to the near-term bullish expectation, but only a push below $591 would indicate a period of consolidation.

Many assert, however, that over the medium-term there is still room for the upside as long as the strong sentiment and uptrend remains intact, geo-political uncertainty persists, and the widely held expectation of dollar depreciation materialises.

Caution is, therefore, the watchword for players in the bullion market. The market is indeed vulnerable to swift and violent corrections.

In the Indian market, at current high prices, there is bound to be slowdown in consumer demand. Indeed, scrap sales are expected to increase as sellers benefit from rising prices.

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