Gold prices crashed 5 per cent on Saturday plunging the Indian bullion market into panic. Prices nosedived from Rs 28,842 for 10 gm to Rs 27,748 in just one session. Silver prices fell 4 per cent.

The domestic market appears caught in negative sentiment, with investors panic-selling coins. “Investors are selling coins, but not jewellery,” says Kapil Parekh, Vice-President of Bombay Bullion Association. In Mumbai, there were few buyers for gold and jewellery on Saturday. “The market has become unpredictable, forcing people to stay off,” said Parekh.

Psychological breach

Echoing this, Prithivraj Kothari, Managing Director of Ridhi Siddhi Bullion Ltd and former President of Bombay Bullion Association, said, “Everyone seems to be wanting to sell.”

The drop in prices mirrored the sharp dip in international rates on Friday. Price of gold declined below the psychologically important $1,500/ounce level to close at $1,482. The ostensible reason for the panic was the International Monetary Fund and the European Union refusing further aid to Cyprus. This led to fears that the beleaguered nation will sell the gold held by its central bank.

Central Bank sales effect

There were also fears that other European nations such as Italy, Greece and Spain could sell their gold holdings thus pressuring prices of the yellow metal. According to the World Gold Council, Cyprus holds just 15.5 tonnes. True, the sale by this nation may not upset the demand-supply equation in the international market, but Italy holds a sizeable 2,452-tonne reserve, Spain 283 tonnes and Greece 112 tonnes.

Central banks of China, Russia, Mexico and others have been adding to their gold reserves in a bid to diversify their risk from excessive holdings of US dollar-denominated instruments. Net purchases by central banks in 2012 were 17 per cent higher over the previous calendar. In the December 2012 quarter, central banks’ gold purchases were 29 per cent higher than in the corresponding previous quarter.

Speculative unwinding

Another reason for the crash was unwinding by hedge funds, traders and other investors. When gold breached an important technical support at $1,500 on Friday, it triggered stop losses in speculative positions, thus bringing pressure on prices.

Warnings on gold outlook by investment managers such as Societe Generale, Deutsche Bank and Goldman Sachs too dampened the sentiment.

Opportunity in the fall

Many traders and investors are viewing this decline as an opportunity to buy. Ridhi Siddhi Bullion’s Prithviraj Kothari expects demand to pick up in the country. “The marriage season is coming up as also Akshaya Trithiya. There could be good demand for gold,” he said.

The former Bombay Bullion Association chief doesn’t expect Italy to follow the Cyprus example of selling gold to get over its financial troubles. “Italy could pump in more money rather than sell gold.”

>lokeshwarri.sk@thehindu.co.in

comment COMMENT NOW