“We are not at the end of our wits as far as gold imports are concerned,” Economic Affairs Secretary Arvind Mayaram said in an interview yesterday. “If required, there are other measures that can be taken and they will be considered at the appropriate time.”

India this month increased a tax on gold imports as it tries to curb demand for the metal that’s contributed to the current-account gap and hurt the currency. The rupee dropped the most in a week yesterday as the central bank left borrowing costs unchanged, after falling in each of the last six weeks and touching a record low of 58.9850 per dollar on June 11.

The Finance Ministry is finalizing measures to attract foreign investments, including liberalizing foreign direct investment caps in various industries, Mayaram said. The slide in the rupee value is temporary, he said.

“We need to continue to push for long-term capital inflows and therefore the FDI policy has to undergo a revamp,” Mayaram said. “We need to move in this direction quickly and it needs to be a paradigm shift in how we look at FDI.”

While almost every other asset class from currencies to equities and bonds succumbed to the market rout that started in late May, bullion has managed to stay in a trading range of $1380-$1410.

“Selling abated a little as the opportunity cost decreased. Both the Dow and Nikkei started to give up their gains, so there was less need to sell gold in order to buy equities,” said Warren Gilman, chairman & CEO of investment firm CEF Holdings told CNBC.

On the physical demand front, buying from India and China has also helped to offset the selling by exchange traded funds (ETFs). Gold and silver imports into India, for example, surged nearly 90 percent in May from the same period a year earlier, spurred by lower prices and festive demand.

Still, market watchers warn that the relative calm seen in this asset class may not last for long, and this week’s meeting by the Federal Open Market Committee could be a game changer.

Investors are on the lookout for further hints of when the U.S. central bank plans to scale back its bond buying program, which has been supportive of the precious metal in the recent years. A hawkish signal from Fed Chairman Ben Bernanke could bring about renewed selling in the previous metal.

“If the Fed is going to cut back on asset purchases and if at the same time, there’s no inflation in the system, there’s no investor demand for gold,” said Uwe Parpart, managing director and head of research at Reorient Financial Markets.

“Gold is going to go down. There’s no question about it,” he added.

Erik Wytenus, foreign exchange and commodities at JPMorgan Private Bank agrees that as the U.S. approaches the end of its easing cycle, it will be negative for gold prices. “One of the most tried and true rules of investing is: do not fight central banks. We’re getting to a state of affairs where you’ve got all this obsession about tapering…that is supporting U.S. yields, the U.S. dollar and that’s going to be a headwind for the gold price,” he said.

When the dollar strengthens, gold futures, which are traded in dollars, become more expensive for investors who use other currencies to buy the yellow metal.

And with stability emerging in the euro zone, Wytenus said demand from “talk risk holders of gold” will decline.

Societe Generale on Tuesday downgraded its fourth quarter forecast for gold prices this year to $1,200 an ounce from $1,375, citing a “paradigm shift” in investor attitude towards gold resulting from the recent dramatic selloff in April and the prospect of Fed tapering.

“ETF gold selling has averaged about 100 tons per month since the April sell-off. We expect continued ETF selling to exceed higher demand for jewelry, bars and coins,” said Michael Haigh, head of commodities research at Societe Generale.

“While production cost concerns may slow the price decline below $1,200, this factor is unlikely to provide firm support until we get closer to $1,000,” he added. The average cost of mining gold is estimated at around $1,200 an ounce, according to the bank.

On Thursday, the World Bank reduced its global growth forecast for this year to  2.2%, down from its original forecast released in January of 2.4%. The Bank  reduced its forecast for Emergin Market growth, and sees the euro zone shrinking  0.6%. For the US and Japan, the World Bank increased its forecasts which was  helped by fiscal and monetary stimulus. The World Bank also reduced its 2014  forecast for global growth to 3.0% from 3.1% back in January.

The decline in Silver comes despite a positive reading from the Commerce  Department on Advanced Retail Sales in the US. The headline number increased by  0.6% in May to $421.2 billion. The increase in overall Retail Sales was better  than the average forecast of a 0.4% during the month. Retail sales was up 4.3%  in the past year, and is a strong gauge of GDP given it makes up more than 60%  of overall US growth. The headline growth was driven by a 1.8% increase in auto  sales. Excluding autos, retail sales increased 0.3%.

Despite the decline in silver prices, hedge funds continued to move into long  postions according to the most recent commitment of traders report released by  the CFTC. According to the report, managed money increased long positions by 738  contracts, and reduced short positions by 429 contracts.

 

Options trading activity in the silver market has picked up substantially  after the large decline in April. Implied volatility continues to remain  elevated near 31%, which has increased the premiums on both call and put  options. Implied volatity is the markets estimation of how much a security will  move over a specific period of time on an annualized basis.

 

The technical picture on a monthly basis for silver prices is ominous. A  close below the 20.50 level would put silver prices back into a large range  between 20 and 10.

The product, to be listed on the Shanghai Stock Exchange, will track the performance of spot contracts on the city’s gold bourse, Xu Yiyi, the fund manager who will run the ETF, said in a telephone interview. Shanghai-based Huaan has yet to set a date to market the fund to investors, he said.

Gold sank into a bear market in April, after rallying for 12 years, amid bets the Federal Reserve may taper stimulus. While the rout hurt investors including hedge fund manager John Paulson and withdrawals from exchange-traded products set a record pace this year, many buyers in China viewed the slump as chance to stock up on jewelry, coins and bars.

“Gold hasn’t lost its appeal as a store of value in China,” Xu said on June 13 from Shanghai. “Investors here usually like to buy on dips, so a decline in the bullion prices this year should work in our favor.”

Gold for immediate delivery slid as much as 31 percent from a record $1,921.15 an ounce in September 2011 through April 16. Prices are down 17 percent this year to $1,391.22 at 11:13 a.m. in Shanghai. Gold of 99.99 percent purity on the Shanghai Gold Exchange traded at 277.39 yuan a gram ($1,408 an ounce).

Assets in global exchange-traded products backed by bullion fell 20 percent this year as some investors lost faith in the metal as store of value. Holdings in SPDR Gold Trust, the world’s largest bullion ETF, fell to 1,003.5 tons as of last week, the lowest since 2009.

Huaan and Guotai Asset Management Co. this month received the China Securities Regulatory Commission’s permission to start domestic ETPs backed by gold, which will be denominated in yuan.

“Gold-backed ETFs have been a huge success around the world since their introduction 10 years ago,” Albert Cheng, a managing director for the Far East at the World Gold Council, said in an e-mail on June 13. “Anything which makes it easier to access gold as part of a balanced investment and savings portfolio is a positive step.”

Huaan, which had considered starting a gold ETF for four years, ran into regulatory difficulty because of a rule prohibiting funds investing directly in physical commodities, Xu said. The company overcame this by linking the fund to contracts on the Shanghai Gold Exchange rather than bullion sitting in a vault, he said.

China Construction Bank Corp. (939) will be the custodian bank for the ETF, with responsibility for ensuring that spot gold contracts are in place to back the fund, according to Xu.

Investors in Huaan’s gold ETF will be able to convert contracts into bullion through the Shanghai Gold Exchange under the framework of the gold bourse, he said.

In its latest gold survey, mining consultancy Surbiton Associates noted that despite the quarter-on-quarter production decline, the March quarter’s production figures were still slightly higher than the previous corresponding period.

“It is the same old story for the March quarter. It’s the shortest quarter of the year and also covers the Christmas/New Year holiday period. In addition, there was the usual dislocation due to wet weather from the summer cyclones,” said Surbiton director Dr Sandra Close.

She noted that the sharp decline in the gold price during the second week of April occurred after the close of the March quarter.

Between April 10 and 16, the gold price declined by $195/oz from $1 575 to US$1 380/oz. However, in Australian dollar terms the fall was smaller due to the weakening of the Australian dollar exchange rate.

“Despite the sharp fall in early April, currently the local gold price is not as dramatically down as some would suggest,” Close said.

“At the current exchange rate the Australian dollar gold price is around the A$1 450/oz mark, making the decline since early April now only about A$60/oz or some 4%.”

As most Australian gold producers incurred their costs in Australian dollars, the exchange rate was an important factor.

“We hear so much about the high Australian dollar but in fact the Aussie has lost around 10c against the US dollar since early April. This has had a considerable impact.”

Close dismissed the idea that the cost of gold production in Australia was rising at an alarming rate and would render many operations uneconomic.

“The cash cost of producing an ounce of gold is a notoriously bad guide to production costs and can be quite misleading. It takes no account of changes in gold head grades (the grade of gold ore being fed into treatment plants) which can have a huge influence on the cash cost of gold produced.”

Close pointed out that for about a decade, gold head grades have been declining as the gold price has risen and made it economic to treat lower-grade ore. She said that given the lower prices now, this trend could well be reversed as producers responded to changing circumstances.

Close said that generally speaking, anyone who had been following the gold industry for less than a decade has only ever seen rising gold prices, and added that it must have come as a shock for some to discover that the gold market was like any other market and that prices can fall as well as rise.

“Since the recent downturn, I have been asked several times if the Australian gold mining industry would survive. Given that the Australian gold mining industry has been around for more than 160 years and has faced far greater challenges than what is so far a relatively small decline in price, of course the industry will survive.”

Although there has been recent reports of gold operations closing or being put up for sale, Close said that this was not unusual and had been a feature of the Australian gold industry for most of the modern gold boom.

“At any particular time, there will be operations that are doing extremely well, those that are OK and some that are marginal and struggling. Obviously the most vulnerable and those least prepared will be most affected by events such as a fall in price.”

She added that the mining business is a matter of optimisation, and noted that it was always prudent to have practical contingency plans to deal with both technical and economic uncertainties.

“One of the factors that could push gold prices lower would be if the US Federal Reserve actually began to phase out quantitative easing, rather than just talking about it. On the other hand, the longer term outlook for stability in South Africa, which is still a significant gold producer, is a cause for concern.”

Investors expected silver to be one of the biggest gainers in 2013, with a 33 percent return, a survey in December showed. Instead it’s leading a retreat in commodities with a 28 percent plunge to $21.79 an ounce, on track for its worst performance since 1984. While the median prediction from 14 estimates compiled last week is for a rally to $23.50 by Dec. 31, that would still mean a 23 percent drop for the year

Analysts expected silver to surge because either turmoil would boost demand for precious metals as protection against inflation and currency debasement or accelerating growth would spur more industrial buying for everything from solar panels to batteries. The collapse of gold into a bear market, steady consumer prices and mounting concern about the strength of economies means silver’s allure is instead diminishing.

“Silver has been caught in the crossfire between being a precious and industrial metal,” said John Stephenson, a senior vice president and fund manager who helps oversee about C$2.7 billion ($2.65 billion) at First Asset Investment Management Inc. in Toronto. “Since investors were selling gold, silver also lost luster. We need enough economic growth to happen before people can start considering it as an industrial metal.”

This year’s plunge in silver exceeds the 17 percent drop in gold, which is poised for its first annual decline since 2000. The Standard & Poor’s GSCI gauge of 24 commodities fell 3.9 percent, extending its retreat from last year’s peak to 14 percent. The MSCI All-Country World Index (MXWD) of equities advanced 6.1 percent since the start of January and a Bank of America Corp. index shows Treasuries lost 1.6 percent.

Investors are maintaining their belief in silver even as they lose faith in gold. While the amount of silver held through exchange-traded products is little changed this year, and within 5 percent of the record reached in March, gold holdings dropped 19 percent, data compiled by Bloomberg show.

Silver investments stand at 18,918 metric tons, valued at $13.3 billion and enough to meet global demand for jewelry and silverware for almost three years. The value of gold ETP investments slumped 33 percent to $94.6 billion this year.

Investors for now are treating silver more like a precious metal than an industrial one, with its 30-week correlation coefficient to gold at 0.85, from 0.68 in 2011. A figure of 1 means the two move in lockstep. Silver also tumbled into a bear market in April and is now 56 percent below the record $49.8044 reached in April 2011.

The slump spurred demand for physical metal, with the U.S. Mint predicting last week that its gold and silver coin sales may reach a record in 2013. The Austrian Mint sold about 2 million ounces of silver in April, compared with 8.8 million for all of 2012. Degussa Goldhandel GmbH, a precious-metal trading and investment company in Frankfurt, said silver sales last month were double the first-quarter average.

Hedge funds and other large speculators have turned bullish again after betting on lower prices as recently as mid-May, U.S. Commodity Futures Trading Commission data show. They are holding a net-long position of 1,230 futures and options, compared with a five-year average of 21,400 contracts.

Industrial demand may gain as the global economy improves, with the International Monetary Fund predicting growth of 3.3 percent this year and 4 percent in 2014, from 3.2 percent in 2012. About 50 percent of silver is used in industry, compared with 10 percent for gold, data from the Silver Institute and London-based World Gold Council show.

Consumption by industrial users will rise 1.7 percent to a three-year high of 14,625 tons this year and gain another 2.8 percent in 2014, Barclays Plc predicts. A car contains as much as 30 grams (1.1 ounces) and a mobile phone as much as 0.25 gram, according to Washington-based Silver Institute data.
Slowing investor demand means industry will have to absorb a bigger share of this year’s supply glut, which Barclays says will expand 8.9 percent to 5,512 tons. The cumulative surplus since 2009 will have reached 20,759 tons by the end of 2013, or almost 10 months of mine output, the bank predicts.

Inventories (COMXSILV) monitored by Comex in New York rose 11 percent since the start of January, touching a 15-year high of 5,204.1 tons in April.

China, the biggest buyer after the U.S., imported the smallest amount of metal since at least 2008 in April, customs data show. The nation more than doubled mine output since 2000, according to CPM Group Inc., a New York-based research company

Signs the U.S. economy is strengthening boosted speculation the Federal Reserve will curb stimulus that helped silver jump 91 percent since 2008. Fed Chairman Ben S. Bernanke said in May that the pace of the $85 billion in monthly bond buying could be reduced if the jobless rate keeps dropping. Policy makers will trim purchases to $65 billion in October, the median of 59 economist estimates compiled by Bloomberg this month shows.

“As the Fed continues to talk down the market and trim down quantitative easing, it will hurt precious metals,” said Scott Gardner, who helps manage $400 million at Verdmont Capital SA in Panama City. “Now that the Fed is talking about slowing it, it makes the market nervous. Unless you see a sustained rise in gold you will not see any improvement in silver prices.”
Gold may drop to $1,100 an ounce in a year, from $1,382.98 now, Credit Suisse Group AG forecast last month. Goldman Sachs Group Inc. sees gold at $1,345 in 12 months.

The slump in silver, mostly a byproduct in the mining of other metals, is crimping profit for mining companies. Shares of Mexico City-based Fresnillo Plc (FRES), the largest primary silver producer, dropped 41 percent in London this year. Coeur Mining Inc. (CDE), which gets about 61 percent of its revenue from the metal, slid 43 percent in New York trading.

Holdings of silver in ETPs rose 1.1 tons this year, compared with a 1,621-ton expansion in 2012. Further gains may be curbed as silver’s widening price swings dissuade investors. The metal’s 60-day historical volatility reached an 11-month high in April as it entered a bear market, the 11th in nine years, and climbed further since. It is now at 37 percent, compared with 29 percent for gold.

“Investor sentiment will remain poor going forward, as with gold, and the real risk will come from further ETP liquidation,” said Jeremy Baker, a senior commodities strategist overseeing about $800 million at Harcourt Investment Consulting AG in Zurich. “You have some decent areas of industrial demand, but you need to see significant uptick in those areas to really see any kind of flow through, and you’re just not seeing that at the moment.”

Assets in the SPDR Gold Trust fell 0.6 percent to 1,003.53 metric tons yesterday, according to data on the company’s website. That’s the biggest fall since May 21 and the lowest level since February 2009, data showed. Fed Chairman Ben S. Bernanke said on May 22 the central bank could reduce its $85 billion monthly bond purchases if the employment outlook shows a sustainable improvement.

“The market’s watching what the Fed is going to do,” said David Lennox, an analyst at Fat Prophets in Sydney. “We’ll be watching for indications from Bernanke about when it might end” quantitative easing, he said by phone today.

Gold has declined 17 percent this year on concern that as the U.S. economy improves the Fed may scale back debt purchases that helped bullion cap a 12-year bull run in 2012. Reports in the U.S. yesterday showed retail sales rose more than forecast in May and jobless claims dropped to 334,000 in the week ended June 8 from 346,000 in the prior period.