The catalyst came last Friday as markets reacted to reports that President Donald Trump had selected former Fed Governor Kevin Warsh as his preferred choice to succeed Jerome Powell as chairman of the Federal Reserve. Warsh, who was widely seen as more hawkish on inflation and in favor of a stronger U.S. dollar, sent shockwaves through commodity markets. Although Powell’s term officially ends on May 15 and Senate confirmation is still required, markets have quickly priced in expectations of tighter monetary discipline, leading to a sharp decline in safe-haven assets, significantly weakening demand for precious metals.The decline was further exacerbated by a stronger US dollar, higher government bond yields and optimistic US inflation data, including the PPI and core PPI. In India, no change in import duties in the Union Budget has removed the domestic premium for bullion, eliminating an important support for local prices.
To add fuel to the fire, higher CME margins are in effect starting today. Gold margins rose to 8% from 6% for non-elevated risk profiles, and to 8.8% from 6.6% for elevated risk profiles, according to an exchange rate statement released late Friday. Silver margins rose from 11% to 15% for non-increased risk profiles, and to 16.5% from 12.1% for elevated risk profiles, effectively forcing leveraged traders to liquidate their positions.
Last week, silver ETF investors at one point had annualized returns of 300%, driven by a structural shortage in the silver market and the so-called debasement trade, as investors turned to physical assets from currencies and bonds amid concerns about rising government debt. “Geopolitical and economic uncertainties, along with Fed independence concerns, strengthened silver’s safe-haven appeal. Momentum buying further boosted gains, with a wave of buying from Chinese speculators fueling the rally and amplifying the sell-off as they took profits,” explained Jigar Trivedi, Senior Research Analyst at Indusind Securities.
ETMarkets.comThe return paradox in precious metals and gold, silver
Yet the current carnage masks a striking performance reality. Over the past year, silver ETFs have still delivered a staggering 130% return, while gold ETFs have returned 68%, dwarfing Sensex’s modest progress of 6%. These numbers explain the momentum chase that preceded this week’s devastation.
However, a longer term lens reveals a different story. Over five years, gold ETFs have grown at a CAGR of around 21%, which is lower than the best-performing small-cap and mid-cap funds, which grew at a CAGR of 28-29%. This shows that broad stock indexes are starting to look competitive over the longer term, while individual stocks can outperform by a huge margin, challenging the idea that precious metals are the ultimate wealth keepers.
Amid the panic, some sophisticated investors are seeing the carnage as a buying opportunity rather than a reason to flee.
“I think a lot of people got on the gold and silver train quite late in the day, and that’s going to lead to a serious shake-off. In fact, we’ve already seen the shake-off and everyone is in pretty deep water,” said Ravi Dharamshi, CIO at ValueQuest Investment.
The experienced fund manager sees that forced sales create value: “We should benefit from the fact that leverage traders are forced to sell and that fundamentals or valuations are not taken into account. So I expect a certain degree of rub-off effect from that, but I don’t think this will be market-defining. For a long-term investor, it is actually an opportunity.”
Apurva Sheth, head of Market Perspectives and Research at SAMCO Securities, has a technical view that contradicts the panic narrative.
“Gold has witnessed sharp volatility in recent weeks, with stories quickly emerging to explain the pullback. One camp attributes the move to the appointment of a hawkish new Fed chairman, prolonging fears of tighter monetary conditions. Another commentary points to profit booking after a strong multi-month rally. These explanations may sound convincing, but markets ultimately react to the price, not the stories,” Sheth noted.
“From a price action perspective, the larger trend in gold clearly remains intact. The long-term structure continues to show higher highs and higher lows, and the recent decline looks more like a pause within an ongoing uptrend than the start of a reversal. Importantly, previous breakout zones are holding, indicating that strong hands are still willing to pile on dips.”
Sheth expects a period of a certain range: “What seems increasingly likely is a phase of consolidation over time. Gold could move within a wide range in the coming months, with a maximum around 180779 and support around 136185, 132294. Such ranges are common after sharp advances, allowing excessive optimism to cool and positioning to be reset, without damaging the underlying trend.”
Where to invest now?
Urging caution across the board, Sriram BKR, Senior Investment Strategist at Geojit Financial Services, said: “Prices are still at elevated levels. If supported by new, sustainable fundamentals, they may hold, even if current signals are mixed. Global tensions and uncertainty may continue to support gold as long as they persist. Both asset classes appear due for price consolidation, although timing such a move is extremely difficult. We continue to advise investors not to chase the recent rallies and instead to remain disciplined with asset allocation.
S Naren, CIO at ICICI Prudential AMC, provided a roadmap for equity investors navigating the turbulence: “Within equities, large caps look better placed for valuations. Mid-caps continue to look expensive, although a limited free float has prevented meaningful corrections so far. In small caps, the froth has subsided and there is no longer any euphoria, but the cycles here tend to last much longer than investors think about, suggesting systematic investing rather than lump sum exposure.”
Also read: Budget crash? Don’t panic. Analysts see 35 structural stock picks to weather the storm
On the global backdrop, Naren noted in a column in ET: “Indian markets will be affected by global developments in the US, where valuations remain elevated. If global markets remain stable, India could have a good year. In the event of a global correction, Indian equities may still hold up better relatively speaking.”
His warning about precious metals was prescient: “Precious metals such as gold and silver have delivered strong returns, but investors should be cautious with standalone allocations.”
With traditional hedges failing and stock indexes under pressure, the answer to where investors should deploy their capital appears to be less about finding the perfect asset class and more about maintaining discipline and focusing on the right asset allocation metric.
#Gold #silver #Sensex #Nifty #sliding #investors #park #money