High Margins in Exchanges Creating Volatility in Bullion Market
Going ahead, don't expect investment returns similar to 2023, 2024 and 2025, says says Ajay Kedia, MD, Kedia Commodities
Chennai: The commodity exchanges worldwide have increased the margins on gold and silver and this has been leading to high levels of volatility in the bullion market, says Ajay Kedia, MD, Kedia Commodities, in an interview with Financial Chronicle.
When you compare the previous rallies, what is the significance of this recent rally in gold and silver?
In the past, the 1980s, 1990s or 2000, whenever gold prices gained, geo-political tensions would be in a single region or maybe one or two regions. But since 2020, there have been many such incidents that supported gold. During the pandemic, gold got support because the economy was on standstill. After World War II, we have seen for the first time in the last three years that there are more than five to six wars simultaneously going on.
Central bank purchases and over and above the supply side situation was very much critical because post COVID, capex has not been there in the mining industry and that is why supply of silver is in deficit and that has been picked by investors. Investment has been coming into gold and silver.
In terms of the levels that we have seen in this rally, how is it different from the previous rallies?
Last one year, silver prices gained by more than 300 per cent. In 1980 also we saw prices move from $5 to $50. It was a three-year journey from 1977 to 1980, where we saw $50. And from there we have seen a crash.
In 2011, the rally started from 2006 onwards. It rallied again from $10, $12 dollar to almost $50 dollar and there was a crash. The current rally started from 2022 September where the prices were around $18 and from there we have seen a rally to around $121. It is not a bubble because in 1980, the industrial demand was very negligible. Post-Covid we have seen demand for clean energy, EVs, solar, where the pivotal role has been played by silver. On the other hand, the deficit was consistent from last year. We have also seen ETF demand. All this contributed to this parabolic jump in prices. We can't say this is a bubble because it has been backed by investment demand and industrial demand.
In the past few days, we have witnessed high levels of volatility in the bullion market. So what are the reasons behind this? Do you think the fundamentals are still strong for metals?
Fundamentals started picking up from 2002. As soon as 2026 started, momentum rose, and volatility rose as financial money was chasing this event. Exchanges started raising the margins. Last year the margins were around 12-13 per cent in silver, but now the margin is around 65 per cent. To hold this leverage position or speculative position is very difficult with the 65 or 68 per cent in MCX. The leverage money started coming out and that is why on January 29, we saw margin spikes in Shanghai, London, New York, and India. That is why there was a crash-like situation where silver corrected by 45 per cent and gold corrected by around 22 per cent. The fundamentals remain almost the same.
So what should investors do during such periods of high volatility?
Going ahead, don't expect returns similar to 2023, 2024 and 2025. Look for a long term and it is better to go for SIP(systematic investment plan) so that whenever there is a pullback, you will get more units. For the next couple of months, be watchful in bullion because we are still expecting some consolidation, and that will be a good level to re-enter.
Now tell us something about the gold-silver ratio and how this will decide the trajectory of the metals going ahead.
People buy gold when there is uncertainty. Whenever the economy is going good, demand for silver will be rising. During Covid the ratio went as high as 126 and it was 45 last month. Currently this ratio is around 61 and we expect it should again normalize in the range of 70 to 73 which means gold has to go up or silver has to correct.
What is the outlook for gold and silver for both medium and long term?
Right now, gold is trading around $5,000. We may see gold moving towards $5600 and $5900 on the higher side and support to be around $3600 - $3500 if ETF money or investment money doesn't come to the market or geopolitical tensions ease. On the domestic front, the level could be Rs 2 lakh or Rs 2.10 lakh for gold and support at Rs 1.10 lakh - Rs 1.20 lakh. For silver, $136 is going to be an important resistance, whereas support will be $70 and below that $54. In the Indian market, Rs 4.80 lakh could be a resistance and Rs 1.60 lakh support.
