Planning to buy gold? You may be catching a falling knife

MUMBAI: Commodities are down, some of them markedly so, and are casting a gloomy mast over the local markets.

In Zaveri Bazaar, the most prominent gold bazaar in the country, sentiment is weak, particularly since Tuesday evening.

On Tuesday the market remained weak all the day, with shocks arriving at regular intervals. Silver, which was coasting along happily above $11.50 an ounce throughout the Tuesday morning, suddenly fell by a solid 26 cents to $11.26 when the London market opened.

By the time New York market closed silver was down to $10.92, a loss of almost 60 cents an ounce. Gold had a similar story; falling by about $6 per ounce at the London opening and registering an intra-day fall of more than $17.

There were many traders who were not willing to make heavy commitments on Wednesday. Indeed, many were simply preferring to wait and watch till the New York market opened late in the afternoon.

The main reason for gold losing its sheen is the bearish sentiment in crude oil. Crude prices have plunged to their lowest levels seen since December 2005. The sentiment is so bearish that even the talk of production cutbacks is not halting the decline.

But the fact remains that basically oil price should have nothing to do with gold, as oil has no price parity with the yellow metal, but given the character of the global investing fraternity, we have to live with the ironical fact.

The dynamics of investment world these days are such that if one segment of the market goes down, others simply follow like lemmings running over a cliff.

Yet another reason why gold has lost its sheen is that right now the US dollar is strong, and it is a general feeling that it will maintain its strength, given the elections in the US are around the corner. The US government has right now an interest in keeping the bearish news out of its currency, and goes without saying, it has all the means at its disposal.

With the US dollar index maintaining its lead at 85.67, a gain of 0.27 since Tuesday, and with Japanese yen languishing at 118.12, there are more chances that gold will pass a couple of coming days on a depressed note.

Investors must note that there is nothing in the fundamentals of gold and silver which has changed. The long-term projections are bright.

Silver particularly right now has excellent reasons to make a smart upside move.

On Tuesday evening Ted Butler, probably the most enlightened silver analyst in the world, wrote how silver was geared for a sling-shot advance, and how “the path of least resistance should be to the upside.”

“The current market structure in both gold and silver,” in his words, “according to the Commitment of Traders Report (COT), is excellent.” But again silver is ignored because of the dull sentiment marked by the fall in the crude price.

So what is the advise for the investors? Follow the tactics of gold traders in Zaveri Bazaar. Wait and watch. Don’t catch a falling knife. So long as the oil keeps on skidding, the investors at large will have little affection for gold.