FINGERS CROSSED

Bullion crash stirs margin call fears

Ram Narsinghdev Sahgal MUMBAI

    PUNTERS in gold and silver could be in for a knife-edged weekend. The sudden and steep slump in intra-day prices of overseas gold and silver on Friday has raised fears that long investors could face a flurry of margin calls when Indian commodity markets reopen on Saturday, after the Independence Day holiday.
    On Friday, some traders were glued to their trading terminals tracking the international movement of bullion and other information like US consumer confidence data which have a bearing on the dollar and thereby, on bullion which is seen as an alternative currency.
    Overseas spot gold hit a low of $772.92 an ounce (around 31 grams), down almost $34 from Thursday's close, before recovering to $797.25 at 6:20 pm IST. Spot silver hit a low of $12.42 an ounce, down $1.75, before recovering to trade at $13.31.
    Market watchers are particularly concerned that local investors' margins could be wiped off in silver, which, at the time of writing, was 86 cents below Thursday's closing. A one cent movement in silver equals Rs 15 in local currency while a one dollar movement in gold is equivalent to Rs 10-12. To take a minimum position in silver or gold futures, an investor has to put up a margin of around 5% of the contract value. The minimum contract size in silver is 30 kg while that of gold is 1 kg.
    A 5% margin on silver would mean an investor has to put up Rs 31,146 based on Thursday's closing price of Rs 20,764 a kg. On gold, the margin works out to Rs 57,330 based on Thursday's closing of Rs 11,466 per 10 gm.
    Margin calls are issued by brokers when client positions (buy or sell) go awry and their margins are not sufficient to hold extant positions. Dollar rally takes sheen off bullion
    IN SUCH cases, brokers square off positions and clients are faced with huge losses.
    At its intra-day low, at the time of writing, international silver had fallen 175 cents, translating into a fall in local currency of Rs 88,980 on a minimum lot size of 30 kg (Rs-dollar at 43.10). This would completely wipe out an investor's margin. Similarly, on gold, the low of $34 in international price works out to a loss of Rs 57,700 on one kg, a huge loss for longs.
    Brokers attributed this sudden fall to a heightened build-up of shorts, a dollar rally on falling crude over the past few days and further leg-up against the euro in light of more recent data that showed Europe's economy contracted for the first time since the 15-nation currency was introduced in 1999. "Of late, there has been some amount of borrowing of gold and silver, which suggests a short build-up. The correction in oil and weak Euro zone data have strengthened the dollar, too," Ross Norman, director of TheBullionDesk .com, a UK-based provider of online commodity market information, told ET. "The real challenge for gold is staying above the 3-year trendline of $748. A breakdown from here would entail the redrawing of technical charts. However, some countries — India, for example — have been providing a floor for gold with increased physical demand at lower levels."
    Bullion (gold and silver) is most liquid on Multi Commodity Exchange of India (MCX), India's premier commodities futures bourse, accounting for 65% of the exchange's daily turnover of Rs 20,000 crore. Since India is the world's biggest gold importer, domestic prices are largely correlated with international prices. In the case of futures, the largest market being COMEX division of New York Mercantile Exchange, price discovery on this platform influences futures prices globally.
    Unlike in the US, where commodities regulator CFTC publishes data relating to long (buy) and short (sell) positions held by commercial (hedgers) and non-commercial (speculative) entities at periodic intervals, no such data is published in India, making it impossible to determine the long-short ratio.
    However, given the recent jump in gold prices from $800 to $835-836 on a pullback in oil to over $116 a barrel, it is fair to assume there would be a significant amount of longs on the futures side as nobody was expecting a break below $800, according to Krishna Kumar Nathani, MD & CEO of India Bullion Investor Services. Nathani expects gold to trade in a range of $813-750 and silver to trade between $13.60 and $12.40 an ounce. The euro-USD, which is currently at $1.4730, is expected to get support at $1.45/44 and face resistance at $1.50/1.51.
    ram .sahgal @timesgroup .com