The euro-zone's sovereign default risks and the interlinked banking crisis should have spurred gold prices on safe-haven buying. But from the high of $1,921.15/ounce in September, gold price has fallen by 13 per cent as the crisis in Europe escalated. Silver has also had significant price correction. We explain the reasons for the correction and also what rupee depreciation means to Indian gold and silver investors.

Why is gold falling?

The rally in gold price has happened at a breathtaking pace. Between September-2010 and September-2011, the metal has rallied 52 per cent. So, profit-booking could be an explanation for the current correction in price of gold. It is also possible that investors are setting off losses in their equity portfolio with profits in the yellow metal. What is also interesting to note with gold is that this metal which was moving in tandem with dollar in 2010 has broken its ties with the greenback. While dollar has inched up from 75.9 in September to 79.6 now, gold has dropped 13 per cent to $1,675.93/ounce. This just means that the strengthening dollar is eroding demand for gold as an alternative investment. The long positions that were built in gold on expectation of higher inflation in the US on a third round of money printing (QE3), is also being wound up now.

Silver's story

Silver that is a low-value bet compared to goldhad a spectacular rally between 2008 and 2010. It moved from $14.8/ounce in beginning of 2008 to $30.7/ounce by end-2010 giving a return of 107 per cent even as gold moved only 69 per cent higher. Silver was backed by a strong growth in industrial and ETF demand in this period. The metal touched a high of $49.79/ounce in April this year. But since then silver has been giving tough time to its investors with very volatile price movements. In just two weeks post traversing the all-time high, silver slipped to $32.5/ounce and gave investors the first jolt. From May lows silver managed to climb to $44.25/ounce in August but couldn't sustain there for long. The metal is at $31.10/ounce currently, down 29 per cent from highs of August. Factors that are weighing on gold are weighing on silver too now.

The greenback's strengthening has weakened demand for silver. A Bloomberg report states that the US Mint has sold 984000 ounces of silver coins so far in November and at this pace the month's sales will be down 73 per cent from a year earlier. With Asian and European countries in trouble, silver's industrial demand too has been hit. Also, as the CME group (manages trades in COMEX) has increased margins on silver futures contract sharply, a large amount of winding-up is happening now say market observers.

Impact of rupee

As gold started correcting post traversing $1,921.15/ounce, spot prices of the metal in India hit a new high (at Rs 29,123/10 gram on November 16), thanks to the fall in rupee. Rupee has corrected very sharply against the US dollar in the last one year. Rupee is at 52.26 now down from 45.76 a year earlier, a 14 per cent correction. The depreciation in rupee though has made gold purchases costly for Indian investors, the returns for those who held gold in their portfolio last year has magnified.

From end-October last year, gold in dollars has appreciated 26 per cent. In MCX, the most active contract in gold is at Rs 28,430/10 gram now, up from Rs 19,713, a 44 per cent return. Similarly, silver has also given higher returns for domestic investors. If rupee manages to gain value against dollar in coming weeks and given that weakness persists in gold for some more time, Indian investors will see gold price coming down.

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