Gold May Seek Further Highs On Investor Interest

Chennai: Last week, gold saw its roller-coaster ride, which we have been witnessing since the beginning of the year, take it to a new peak of $923.40 a troy ounce. The yellow metal was spurred by a power shortage in South African mines, including some of the world’s biggest. Power shortage affected production for at least two days in succession.

What next for gold? Certainly $1,000 an ounce is not far away and there are valid reasons for gold to top that level. Primary, of course, is the shape of things in the US. The Fed may have come up with an interest rate cut and could be up with another in the next few weeks, but things aren’t as the Fed Chairman, Ben Bernanke, would like us to believe.

According to Antal E. Fekete of Gold Standard University Live, the US is on its way to financial annihilation.

“Confidence in the system is gone, and banks no longer trust other banks. Irredeemable promises can only be redeemed by issuing more irredeemable promises. In such a system, the erosion of confidence cannot be checked. Investors must salvage their capital from the moribund international monetary system and invest in gold,” he says.

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Investing in gold helps transfer one’s capital to safety. The value of gold is more stable than the value of any non-monetary commodity, according to Fekete.

As we have pointed out in these columns before, investors, particularly abroad, would be trying to seek physical gold and try to convert their paper values into gold. This is because the dollar is under pressure, though the US currency is putting up resistance now and then supported by the bond market.

Profit-taking

If the gold market witnessed a fall earlier this month, it could be attributed to profit-taking and even sale by some central banks. But analysts feel once that gets over, gold is headed only one way, up. In fact, the rebound has seen it only seek higher levels as it was witnessed last week.

Gold, according to Fekete, isn’t moving on supply-demand fundamentals and speculators in the market aren’t interest in it either.

Profit-taking could rear its head in the gold market now and then; but it is certain to dry and lead gold to further highs. What will be its peak or when will the bull run is anybody’s guess.

Analysts feel that once profit-taking slows or dies down, gold could witness backwardation wherein spot prices will be higher than futures. That could also end contango or the situation where forward prices of long term futures are higher nearer ones.

Buying strategy

The strategy, therefore, for investors in bullion could be to buy at every dips. Silver, too, is set to keep following gold and a school of analysts even feels that silver could turn out to be a more profitable investment this year than the yellow metal.

On the other hand, worry of recession in the US is all set to keep the base metals choppy. But the problems caused by rains in South Australia, where a couple of coal mines have declared force majeure, should see coal prices rising in the short term.

FMC Ordinance May Build Investor Confidence

Mumbai: The Union Cabinet’s decision to issue an ordinance to give autonomy to the Forward Markets Commission (FMC) is seen as a move that will help build the confidence of investors - be it investment or mutual funds, financial institutions or small traders.

“It is a positive signal to the commodities market that could now witness broad-based participation of players who matter rather than a handful of speculators,” said an official with a commodities advisory firm.

Indication

The move on ordinance is a silver lining to the commodity markets that would pave way for “progression towards a more mature market. Although we are long way to go, the ordinance would change the face of Indian commodity markets as it gives more power to the regulator FMC,” said Si. Kannan, Associate Vice-President of Kotak Commodity Services Ltd.

Enabling growth

According to Joseph Massey, Deputy Managing Director of MCX, the Centre’s approval of the ordinance before the passage of the Forward Contracts (Regulation) Bill (FCR) will enable the industry to grow on the lines of global exchanges. “The bill provides greater autonomy to FMC for better regulation of the market and it also allows the launch of new products such as options and indices. The participation of banks, FIIs and institutional investors was in some way linked to the approval of this Bill. With the autonomy of FMC, we believe, that these institutions will now be allowed to participate in commodity futures market,” he said.

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Ravinder Sachdev, Head (Legal) of NCDEX said: “FMC will now be able to impose financial penalty on errant members and also regulate intermediaries like warehouses, depository participants and others. The investors who are not satisfied with an FMC order can appeal to the Securities Appellate Tribunal and then the Supreme Court.”

Kannan said that the Government had finally turned pro-active in allowing greater freedom to the commodity market regulator and hence, improving the market by way of ordinance as the final amendment in the Parliament might take some time. “Product innovations are a key to market strength and success and this ordinance, by allowing greater powers to FMC, would pave the way for products like option on futures, index futures and option, and weather derivatives. And more importantly the Indian market will have a commodity index (that may be tradable) for the world to look at, similar to ones in the developed countries,” he said.

FMC powers

The move to arm FMC with more power would give retail investors a platform to play safe, by way of portfolio management that is restricted now. Further, new product innovations like option on mini futures and structured products that are very popular in the capital market might be replicated in the commodity market if FMC wishes to do so, he said.

“Also, FMC can levy penalty, charge fees, take their own decisions like SEBI and can allow new product developments and amendments, enabling the decision making process to be faster in the much-needed commodity market,” Kannan said.