Speculative positions are building up in gold and silver as prices have started falling.
A large part of the addition in open interest in recent weeks was the result of traders starting to take positions in silver and gold, expecting a further fall in prices of the precious metals. Traders expect some more softening in bullion. More than that they believe the rupee may appreciate a bit in the days to come, which may bring down the cost of importing these two metals. This may result in a fall in their prices on bourses.
From December onwards, the market-wide average open interest positions in gold have gone up 25 per cent. In silver, open interest positions (speculative positions or open positions on futures trade) have gone up 39 per cent since the beginning of December. During the period, prices of gold and silver have come down by 5.15 and 8 per cent, respectively.
However, since December 29, silver open interest positions have come down by 15 per cent. This indicates some traders booked profit in silver when prices fell below Rs 50,000 a kg. In gold, too, open interest went down by five per cent during the period as some shorts may have been covered by tactical investors.
“We have been advising our clients to sell on rallies in gold and silver,” said Atul Shah, chief operating officer, Emkay Commotrade. He is not the only one. Many other brokers with whom Business Standard spoke to said their clients are shorting bullion, expecting a price fall.
Gold outshone other asset classes last year. It is expected to continue its uptrend in the long term, but in the short term, the technical trend looks negative.
Praveen Kumar, chairman, Maya Global, a Dubai-based commodity broking firm, said, “The fundamentals of gold are strong and sound, but in the short term, the global financial crisis is going to play a major role in gold's movement. If the euro zone falls further into deeper financial crisis, developing countries are going to struggle for the first half of 2012 and so will gold. If the lack of consumer confidence persists, gold will range anywhere between $1,450 an ounce and $1,660 an ounce.”
However, when gold and silver prices were falling, some traders went long in the gold/silver ratio and made money. This is a curious case of someone making money by going long in underlying commodities, the prices of which were falling.
Traders who have been taking into consideration the gold/silver ratio are at a better advantage, as it has moved up from last month’s 53.21 levels and reached a high of 57.12 during December, finally settling at 56.21. The gold/silver ratio trading indicates how many ounces of silver one can buy with an ounce of gold.
