A steep fall in gold prices and breaking of crucial technical support levels have led to an increase in bearish bets by traders, as reflected in rising open interest, which went up to 11,562 lots on Friday compared to 10,502 lots on Monday.
In the last two days, the price fall has triggered margin calls and traders turned bearish, resulting in a dramatic surge in turnover and open interest of the Multi Commodity Exchange (MCX), India’s largest commodity futures trading platform.
While gold prices have fallen nearly 4 per cent last week, of which around 3.5 per cent decline was noticed in the last two days.
Gold for near-month delivery fell to close on Friday at Rs 26,135 per 10g from Rs 27,214 per 10g on Monday and Rs 27,079 per 10g on Wednesday.
“The steep fall in gold prices have triggered lots of stop losses on the MCX, as traders have turned bearish,” said Sugandha Sachdeva, in-charge (metals, energy and currency) research, Religare Securities Ltd.
In a rush to square off open position at the existing price, traders’ pushed “sell” orders. Consequently, total turnover of the MCX has suddenly sparked to Rs 7,933.7 crore from gold contracts on Friday compared with Rs 5,115.2 crore (Rs 51.15 billion) on Thursday and significantly lower at Rs 2,770.2 crore (Rs 27.70 billion) on Monday.
Similarly, aggregate open position in the gold contracts at the exchange shot up to 11,562 lots on Friday compared to 10,502 lots on Monday. Aggregate open position steadily moved up in the second fortnight of October from 9,941 lots on October 16.
Aggregate trading volumes have trebled last week from 10,195 lots on Monday to 30,366 lots on Friday.
“With inflation being lower globally, investors have felt no need to consider gold as a safe haven,” said Sachdeva, who forecast gold’s next support level at $1,120 an oz in the international market and Rs 25,000 per 10g on the MCX.
The bullion followed the move in the international market, where investors dumped bullion to invest in riskier assets, including real estate, equities and bonds. After falling to $1,163 an oz, gold recovered a bit to settle on Friday at $1,173.2 an oz in London, as bargain hunters booked the precious metal for profit in future.
Therefore, gold recorded a weekly decline of 4.34 per cent from $1,226.06 an oz on Monday and 3.20 per cent slump from $1,212.06 an oz on Wednesday.
Gold is facing a sell-off all around due to the Fed’s last week report on growing US economy.
The Federal Open Market Committee, in its statement on Wednesday, has said there has been a considerable improvement in outlook for the labour markets since the beginning of asset purchase programme.
The committee estimates that there is sufficient underlying strength in the economy to support ongoing progress towards maximum employment in respect to price stability.
However, the central bank is maintaining its existing policy of reinvesting its principal payments from holdings of debt and asset-backed securities agencies along with rolling over maturing treasury securities at auction.
This has raised hopes for the rise in US interest rates “sooner than expected”.
Also, in a completely divergent stance, Bank of Japan has surprised markets by announcing a stimulus package worth $726 billion to support its flagging economy and as consumer inflation cooled off further in the month of September.
This has steered a rally in global equities and dollar Index also ticked higher, trading near its four year high.
The move pulled yen down to 111.05 against the dollar and also helped dollar index to surge to 86.57, steadily moving towards record high 86.75 hit early October.
“Gold, therefore, might see the next initial support level of $1,145 an oz and then, $1,100 an oz thereafter after breaching the first support level,” said Gnanasekar Thiagarajan, director, Commtrendz Research.
