Should you be brave and buy gold, or silver?

We are in a general commodity correction wherein we must expect all commodities to bottom more or less simultaneously since money is fungible and you have no means of knowing which bull is trapped where, says Sonali Ranade

My inbox is flooded with queries on how far the correction in gold can go and if it may be time to buy the metal, or its poorer cousin, silver.  I can only venture a rough answer based on what the technical charts say.

First off, gold and silver are now in long-term bear markets. The thing about bear markets is that they last a long time and can amaze in terms of the price compression they can achieve. 

To put this into perspective, the last bear market in gold lasted 22 years and achieved a price compression of 50 per cent from the top. In other words, the last bear market saw gold drop from $700/Oz to $350/Oz. 

Likewise, the last bear market in silver lasted 22 years and saw the metal drop in price from $40/Oz to $3.50/Oz. 

Clearly, there is a lot of merit to the adage that you shouldn’t be trying to catch falling knives in a bearish market. Just a cursory look at history should warn one off.

The price of gold in the Indian market varies with the metal’s price in the international market but includes a host of other factors as well. These are adjustment for purity, the USDINR rate, import duty and other service charges. Of these an appreciation in the USDINR rate is something that investors in India try to hedge by buying gold.  Depreciation in the international price of gold takes away from the value of the hedge against an appreciating dollar in the INR market.

We are in the early stages of a bear market in both gold and silver where the price compression is the most pronounced. Barring a haircut devaluation of the INR, it is doubtful if dollar appreciation against the INR would be enough to offset the falling metal prices internationally for many more months. So the case for investment in gold as a hedge is pretty weak.

Gold: Amazing as it may sound, the first support for gold lies at $ 1267.50 followed by a more robust support at $1210. In fact a case can be made for gold to test 1060 as the WAVE III, in which we presently are, unfolds in its full glory. My sense is that there is another leg to the price collapse that may see gold decline to 1260 or so. We could see a series of small rallies from there with the bottoms gradually finding support at 1210. Clearly it is too early to be buying the metal.

Silver: Silver charts are simply terrible. Silver’s first support lies at $20 followed by a more robust support at $14. I would be very surprised if we the metal halted its decline before $14. In passing, we are in a general commodity correction wherein we must expect all commodities to bottom more or less simultaneously since money is fungible and you have no means of knowing which bull is trapped where. Such corrections across commodities happen once every few years and their price compression is ferocious.

So the thing to keep in mind is that this correction is not just about gold, silver or other metals. It’s about every sort of risk asset.

Be safe than sorry.

Sonali Ranade is a trader in the international markets