Is it time to buy gold? A little wait may be worth it --- ET

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 Thinking of accumulating gold because of the steep decline in prices in the past two weeks? Analysts feel this is not the time to go bottom fishing. Global gold prices touched a 5-year low of $1,090 per troy ounce (31.1 gram) on 22 July, down more than 42% from the all-time peak of $1,900 reached in September 2011. Though prices bounced back a bit on Thursday, experts feel more pain is in store. The metal is trading very close to the support level of $1,080. If it falls below $1,080, prices could recede by another 4-8% in the international market. "If the $1,080 support is broken, the next major supports are $1,040 and $990," says CP Krishnan, whole time director, Geojit Comtrade.

However, the price may not fall too much because $1,000 per troy ounce acts as a long-term support. "It is the mining cost of gold," says Krishnan. Even so, the rise may be capped by resistances. "Heavy long build up in gold happened between $1,130 and $1,230. All these bull operators are in losses now. They will try and recover their money once the gold price reaches $1,130-1,140. This range will now be a major resistance zone," says Ram Pitre, an independent commodities analyst.

The cut in silver has been more severe. The white metal is down 70% from its all-time peak of $48.6 reached in April 2011. Silver has been hit badly because it also has industrial uses. The slowdown in China has pulled down prices to $14.71 per troy ounce. The downside is not capped here because its mining cost is around $10.

Factors Pulling Down Gold

Gold is down because recent events have led to a reduction in risk aversion. The Greek crisis has been resolved and Iran has signed the nuclear deal with the US. China, the largest consumer of the metal, has witnessed large scale selling. And fears of an interest rate hike by the US Fed have buoyed the dollar. Experts say there is nothing that can trigger a rally in gold right now. "Gold is the least preferred asset class right now," says Krishnan. The total gold holdings in SPDR Gold Trust, the largest gold ETF in the world, coming down from 1,291 tonnes in 2012 to 690 tonnes now, a fall of 47%, reflects this shift.

The Chinese ornamental gold demand is expected to get affected in coming months because of the economic problems there. In India, the compulsory PAN requirement for purchase of more than Rs 1 lakh has already started affecting demand. The monsoon season is anyway a lean period for gold demand in India. "Since we are in the middle of a lean period, there is no need to jump in right now. Investors should wait for 2-3 months more," says Manoj Kumar Jain, director (commodities & forex), IndiaNivesh Commodities.

Till now, domestic gold prices were cushioned from the global crash due to the depreciation of the rupee against the dollar. But the rupee has stabilised in recent weeks and there is also a possibility of it appreciating. "If that happens, it will be a double whammy for domestic gold investors," says Pitre.

Should You Short Sell Now

Given the headwinds faced by gold, short-selling the metal in the commodity futures market could prove rewarding. You can buy and sell gold and silver by paying just 5% of the value. However, you have to buy (or sell) at least one contract of 1 kg. Gold is trading at Rs 24,667 per 10 gram so the total value of one contract is Rs 24.67 lakh and the margin required is Rs 1.33 lakh.

But playing the futures market is a risky game where newbie investors can lose their shirts. If the leverage multiplies your potential gains, it also amplifies the possible losses. If you have short-sold and the price of gold falls by Rs 250 per 10 gram, you make a cool Rs 25,000 on a contract. A 1% change in gold price will yield a 20% gain on the investment. This could very well work the other way round. A 1% rise in the price of gold will wipe out 20% of the investment and will result in a margin call from the broker. A 5% change in the price can either double your investment or wipe it out completely.

Analysts believe one should not short gold at the current levels. It is normal for the market to pull back to a previous support before the next wave of sell off begins. "$1,130-1,140 (Rs 25,400 per 10 g) is a good price to short gold," says Pitre. Others say that traders should take necessary precautions by keeping strict stop losses and a buffer of margin money in case the price moves in the other direction. "Short selling is a high risk game, so investors need to be careful and place a strict stop loss," says Krishnan. A stop loss can be placed at Rs 25,700, which was the price of gold before the recent crash.