Market Downturn Analysis
The market witnessed substantial selling pressure, leading to significant drops in both gold and silver prices. The MCX saw both metals hit lower circuit
levels, reflecting the severity of the decline. Earlier in the session, prices had fallen by 9%, exacerbating the previous Friday’s losses of 17% for gold and 27% for silver. Presently, gold is trading approximately 5% lower after a minor recovery. Investors remain cautious as the Union Budget approaches, concerned about potential changes to import duties on these precious metals. Globally, increased CME margins, taking effect on Monday, February 2, are expected to contribute to further downward pressure. Gold margins have increased to 8% from 6% for non-heightened risk profiles, and to 8.8% from 6.6% for heightened risk profiles. Silver margins have also seen a rise, with a jump to 15% from 11% for non-heightened risk profiles, and to 16.5% from 12.1% for heightened risk profiles.
Gold Price Insights
Gold is currently trading near its 20-day EMA, with the long-term upward trend still intact. Key support levels are situated at Rs 1,40,000 to Rs 1,45,000, supported by a strong USD/INR environment. If prices remain above Rs 1,40,000, the medium-term outlook remains positive. A sustained move above Rs 1,55,000 could propel momentum towards Rs 1,65,000 to Rs 1,80,000+ in the coming months, spurred by domestic economic factors and persistent demand. On the MCX, gold opened at Rs 1.45 lakh/10 gm, down 3% from Friday's closing of Rs 1.49 lakh/10 gm.
Silver Price Overview
Silver prices have experienced a significant correction, sliding from a high of around Rs 4,20,048 per kg to approximately Rs 2,91,000 to Rs 2,91,925. While volatility is still high, immediate structural support is visible near Rs 2,91,000, with stronger support at Rs 2,51,000 to Rs 2,52,000 near the 50-day EMA. Industrial demand continues to be a factor in silver's relative strength. A sustained move back above Rs 3,00,000 to Rs 3,10,000 would suggest renewed buying interest, potentially leading to a path towards Rs 3,40,000 to Rs 3,50,000+ amid ongoing supply constraints. On the MCX, silver opened at Rs 2.74 lakh/kg, down 6% from Friday's close of Rs 2.92 lakh/kg. Silver futures on the MCX saw a nearly 9% decrease.
ETF Market Impact
The BSE has enforced a 20% circuit limit on Gold and Silver ETFs. For the current trading session, the prices of ETFs will be anchored to the previous day’s NAV (T-1 NAV), with transactions limited to a ±20% band. This action aims to reduce excessive intraday volatility and safeguard investors from drastic price fluctuations. The BSE stated in a circular that, given the volatility in gold and silver prices, the Reference Price for Gold and Silver ETFs traded on the Exchange will be based on the T-1 NAV as published by the respective Mutual Funds / Asset management Companies. Consequently, the prescribed price band of +/- 20% shall apply to the said T-1 NAV price for trading purposes.
Trading Strategies Explained
For investors with existing allocations, the decision to hold or rebalance should be based on the gold-silver ratio. As this ratio compresses towards the 50 mark, investors might contemplate taking partial profits and reallocating into more stable assets such as Gold ETFs. This approach helps ensure portfolios remain aligned with their long-term risk appetite. While silver’s dual role as both a precious and industrial metal positions it as a potential return enhancer, its history of volatility suggests caution for retail investors approaching the recent rally. It is best suited as a tactical exposure or a specialized component within a diversified portfolio, according to Tapan Patel, Fund Manager-Commodities, Tata Asset Management.
