Silver falls 14% on demand hiccups

Silver saw a sharp fall of Rs 8,415 or 14 per cent per kg, as demand disappeared and the dollar strengthened here on Thursday after making modest gains earlier in the week. The fall is seen as one of the sharpest in the history of silver trading.

The dollar index has strengthened from its monthly low of 72.70 a couple of weeks earlier and has hit a high of 75.65. The US government is expected to pour lower amounts of money into defence spending after the death of Osama bin Laden, which has caused the dollar to strengthen. Weakness in the euro has also caused silver to fall. As the demand from India also slowed after Akshaya Tritiya, silver prices have fallen without support.

Gold has also seen a fall, but not as steep. Gold on the Mumbai spot was down by Rs 395 to close at Rs 21,755 per 10g. Suresh Hundia, past president of the Bombay Bullion Association and leading silver trader, said, “Markets globally and in India are in a profit booking mode and may continue for some more time.”

The stronger dollar and fall in the euro has caused heavy selling and profit booking in bullion. Also, the Chicago Mercantile Exchange (CME) has raised its margins on silver, which has made investors keep away from taking long positions. CME has raised its margins on silver, causing speculators to keep away.

Spot silver closed the day here yesterday at Rs 51,705 per kg. MCX futures closed 15.2 per cent down from yesterday’s close, falling Rs 9,016 to Rs 50,135 per kg. The fall has been contained as the rupee also fell 0.9 per cent or 39 paise to close at Rs 45 per dollar, keeping silver’s import cost higher.

On the London Spot Exchange, it fell 4.5 per cent to $33.59 per ounce. The usual suspects for rising precious metal prices are mainly inflation rates and loose monetary policy. Inflation rates have also been rising in many countries worldwide: China saw a 5.4 per cent rise and Germany saw a higher than expected rise of 2.7 per cent.

The Bank of England predicts that inflation in the UK should hit five per cent in 2011.

Technically, the market is trading in the range, as the relative strength index for 18 days is currently indicating 38.08. Silver is trading below this and could test at Rs 49,333. Resistance is now likely to be seen at 58,057 and a move above could see prices testing 62,245.