In one of my earlier reports I mentioned that we could see a fall in gold and silver prices over the coming months due to cyclical contraction in global demand. I am changing my view and the so called “cyclical contraction in demand” may not happen this summer. The reason behind is there is greater demand for gold and silver bars by retail investor. These are those group of retail investors who have been investing in equities and fixed instruments and have been investing on their own, instead of using hedge funds. I will give a very good example in this context. A client of mine is an exporter having an annual turnover of $4 - $5 million. He has diverted more than forty percent of this investment from Indian equities to gold and silver. He is only investing in physical gold and silver. At any point of time he has between 2- 3 kgs of gold bars and 150 – 180 kgs of silver. A deal to sell buy or sell gold can be done even at mid night because of the easy trade able nature which is attracting even greater investors from all over the world. The rise in Iran tensions and long term crude oil related global shocks has resulted in further diversification of investor portfolio. Even if one needs to invest in equities for long term, other than manufacturing and technology rest of the sectors will under perform gold and silver. The reason for not recommending investment in other sectors is that services and secondary sector takes the biggest blow when there is any news of a slowdown and hence these stocks fall the quickest.
China's economic growth accelerated to an estimated 10.2 percent in the first quarter. Sustained Chinese growth will only add to the bullishness of gold and silver. The current commodity run in gold, silver, copper and other precious and base metals, is also due to record growth in the worlds most populous country. The overheating of Chinese economy is now where to be seen. China will continue to grow, but in coming years we expect manufacturing led export growth to be substituted by domestic demand led export growth. India will also see a change in the equation where exports will have a greater percentage in GDP from the current levels. All in all the prices of all the commodities are expected to rise further we supplies lad behind demand.
Gold and silver are showing no signs of correction and has room for further gains. However despite the bullish trend, I will still not advise for long term traders to enter the market. One should be in the market but should become a jobber and not leave any open positions for the next day. Whenever gold and silver will reverse, they may give early warning signals but not firm trend.
There is event risk this week. The Chinese premiere will be visiting US this week. Then there is the UN security council on Iran. The G7 meeting is over the weekend. These event risk will gain result in traders going long than short. It will also remain to be seen whether crude oil breaks the $72.00 mark and edge higher towards $80.00.
GOLD
Gold needs to break $614.30 to test the key short term resistances at $622.60 and $630.95. On the lower side as long as $594.00 holds on closing basis, the downside is limited. A consolidated fall below $594.00 will result in $583.80 and $578.80.
SILVER
Silver targets $1377.50 and $1400.00. On the lower side only a consolidated fall below $1247.50 will result in further loses to $1194 and $1138 and $1094 respectively.
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