Buoyed by a combination of supportive factors, both gold and silver have reached unprecedented levels — too much, too soon — which calls for utmost caution on the part of investors and buyers.
At the moment, the two precious metals are not for the faint-hearted. If anything, gold and silver are ripe for a correction. The signs of correction are unmistakable.
On Monday, gold breached the September 2011 high of $1,898 an ounce to reach a new high of $1,980, while silver continued its even more spectacular rally to cross $26/oz, a seven-year-high.
Weak $, Sino-US tension
Apart from uncertainties of economic growth triggered by the Covid-19 pandemic, renewed geopolitical tensions between the US and China as also currency debasement caused by ultra-loose monetary policy, especially in the United States, are seen driving the precious metals complex higher.
The US dollar has weakened to a nearly two-year low position. Real interest rates are in the negative territory. No wonder, gold is reasserting its haven status.
A slight weakness in the stock market, too, aided the precious metals. Inflows into gold ETFs and silver ETFs are accelerating. Last week alone, 55 tonnes of gold and over 1,200 tonnes of silver flowed-in as gold rates soared by over five per cent. Silver gained a spectacular 17 per cent, suggesting a massive weekly gain not seen in 30 years.
Any spectacular commodity rally unsupported by market fundamentals but based purely on short-term speculative considerations is sure to peter out sooner or later. Precious metals will be no exception.
Muted physical demand
At these astronomical prices there is not even a semblance of physical demand in two of the world’s largest gold markets — China and India. Demand has all but vanished as rates in local currencies have become unaffordable. India is going through a crisis situation with shuttered factories and massive job losses. Rural areas are busy with agricultural operations.
According to reports, China Gold Association has estimated a 38 per cent fall in physical demand year-on-year in the first six months of 2020. The outlook for the second half of the year is weak too at the current high prices.
As profit-taking is inevitable at high price levels, on Tuesday, both gold and silver witnessed significant correction with gold falling to $1,900/oz and silver to $23/oz (at the time of writing). The correction in silver is not surprising as speculators had built large ‘long positions’ in recent weeks to reach the highest level since February.
Silver usually tends to be more volatile than gold in its movements. The speculative positions in gold are less-alarming and so there is less fear of a price collapse.
Despite being a large importer and consumer, India does not dictate the world gold market. The country is only a price taker and not a price setter. Indian market merely mirrors global trends. The correction seen in the world market will soon get reflected in the domestic market. It is time to sell gold and silver and not buy.
The writer is a policy commentator and commodities market specialist. Views are personal.
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