The precious metal has outperformed gold recently, apparently due to an unusual condition in the silver futures market
Silver spot and futures prices hit a record high on Monday on the spreading unrest in the Middle East and the falling dollar. However, it seems that the real reason for the surge may lie somewhere else.
Very simply, if silver has risen due to the political turmoil in the Middle East, why has gold not gained at the same pace, and why is the dollar which is traditionally the safe haven in a crisis still weak?
The current situation in the silver market isn't just about prices, but about a particular condition called 'backwardation'. Silver is in backwardation, which is a condition when buyers in the futures market are ready to pay a premium to receive the contract sooner due to fear of a shortage of the metal.
Two banks JP Morgan and HSBC are rumoured to be short on silver and they are said to be covering up their positions and this is pushing the price up.
The current prices are being built up on speculation, not on fundamentals. Depending on the technical position of the silver futures market, these prices may or may not sustain.
As we said yesterday, the market is in a zone where a day or two of rally will be followed by a day or two of decline
The market opened sharply lower, tracking the Asian markets that were trading in negative terrain due to the ongoing turmoil in West Asia, which has fired up crude futures.
The market remained choppy during the entire trading session also on account of the February futures & options contract expiry later this week. However, gains in Reliance Industries following the announcement that British energy major BP Plc will buy a 30% stake in 23 oil blocks for a payment of $7.2 billion, limited the losses.
Feeble attempts of recovery were cut short by profit-booking. A huge sell-off in post-noon trade pushed the indices to the day's lows. There was a marginal bounce-back in the last half hour, but the markets closed in the red.
The Sensex and the Nifty both opened with a negative gap at 18,391 and 5,504. Both the key indices were able to restrain themselves from falling below yesterday's lows, despite massive selloffs in Asia and a sudden sharp jump in crude oil prices. The Sensex hit an intra-day low of 18,187, while the Nifty's low was 5,437. The Sensex ended 142 points down at 18,296 and the Nifty settled 49 points lower at 5,469.
The market remains in a trading zone. The silver lining is that it refuses to go down much in the face of bad news. The advance-decline on the National Stock Exchange was a poor 587:1147.
Declining stocks outnumbered the gainers on the key benchmarks. The Sensex retired with 25 losers and five gainers, while the Nifty had 42 declining stocks against eight stocks on the advances list. Among the broader indices, the BSE Mid-cap index declined 0.85% and the BSE Small-cap index fell by 0.73%.
BSE Oil & Gas (up 1.26%) and BSE Consumer Durables (up 1.21%) were the only gainers in the sectoral space. The major losers were BSE Capital Goods (down 2.12%), BSE Auto (down 1.93%), BSE Bankex (down 1.85%), BSE PSU (down 1.24%) and BSE Metal (down 1.16%).
Following the announcement of the partnership with BP Plc, Reliance Industries (up 2.98%) was the top gainer on the Sensex today. Other major gainers were Reliance Communications (up 1.49%) and Sterlite Industries (up 1.42%). The losers were Hero Honda (down 3.36%), Larsen & Toubro (down 2.65%), HDFC Bank (down 2.59%), Jindal Steel (down 2.48%) and Jaiprakash Associates (down 2.39%).
Maintaining that "some inflationary pressure" will remain in a growing economy, finance minister Pranab Mukherjee today urged the states to strengthen the public distribution system (PDS) to enable the government insulate the poor from the adverse impact of inflation.
Replying to members' concerns during Question Hour in the Rajya Sabha, Mr Mukherjee said the Centre is waiting for a report on how to strengthen and restructure the existing PDS in the country.
Markets in Asia closed sharply lower, following media reports of escalating violence in Libya and anti-government forces taking control of the city of Benghazi. The developments in West Asia led crude prices to levels not seen in over two years. Futures for April delivery in New York rose as much as 9.8% from the 18th February settlement and London-traded Brent surged to the highest since September 2008. Brent may trade between $105 and $110 a barrel in the coming weeks if the uncertainty continues, according to Goldman Sachs Group Inc.
The Shanghai Composite plunged 2.60%, the Hang Seng tumbled 2.11%, the Jakarta Composite tanked 1.33%, the KLSE Composite declined 0.80%, the Nikkei 225 tumbled 1.78%, the Straits Times fell by 1.68%, the Seoul Composite was down 1.76% and the Taiwan Weighted ended 1.87% lower.
Back home, institutional investors were net sellers of equities on Monday. Foreign institutional investors offloaded stocks worth Rs245.42 crore on Monday and domestic institutional investors pulled out stocks worth Rs27.61 crore.
Pharmaceutical major Ranbaxy Laboratories (down 3.05%) today said its consolidated net profit after tax (PAT) surged over five-fold to Rs1,496.80 crore for the year ended 31 December 2010 from Rs296.50 crore in the previous fiscal, the company informed the Bombay Stock Exchange. The company's total income rose to Rs9,380.95 crore for the fiscal ended December 2010 compared to Rs7,986.57 crore in the previous year.
Fortis Healthcare (down 1.55%) today said that it will set up a cardiac centre in Mysore through a joint venture with Karnataka-based Cauvery Hospital. The joint venture will be between its wholly-owned subsidiary, Fortis Hospitals, and Cauvery Hospital, with Fortis owning a majority stake. The cardiac centre, to be located at Cauvery Hospital's Mysore facility, will be set up at an investment of Rs12 crore.
Pharmaceuticals and biotechnology major Wockhardt (down 0.53%) has entered into a strategic global alliance with Sheffield Bio-Science, a Kerry Group Business from the US. Under the partnership, Sheffield Bio-Science will have exclusive sales and distribution rights to supply recombinant insulin to the cell culture markets worldwide.
As a part of the alliance, Wockhardt will develop and supply animal component free (ACF) recombinant insulin for the distribution in the cell culture markets. The Indian major is the first in Asia and only the fourth company in the world to have developed, manufactured and marketed Wosulin-recombinant insulin injectables.
Prices of cotton that are at record highs are expected to stay firm in the near future due to a global shortage
Cotton prices, which have touched record highs recently, are expected to stay firm as farmers and traders hold on to supplies in local markets, in anticipation of higher prices in the international markets.
"On anticipation of high prices due to a deficit of the commodity, farmers and traders prefer to hold stocks. This has led to slow arrivals in the market when demand in the domestic and international markets is very high. If this situation continues, the prices will not come down easily," said a senior official of the Maharashtra State Co-operative Cotton Growers Marketing Federation.
Like other commodities such as copper and rubber, the prices of cotton have surged to historical levels, as production has been lower in leading cotton-producing countries like Egypt, Pakistan, China, Bangladesh and Australia. On 11th February the March cotton contract on the benchmark Inter Continental Exchange (ICE) rose to $1.9455 a pound, a historical high on the ICE. In the domestic market, prices of cotton have more than doubled in the past year to Rs60,000 a candy (356 kg).
"Cotton demand has been high across the globe. But carryover stocks in the international markets are somewhere around 8.8 million metric tonnes. The three years' carryover figures were about 11.5 to 12 million metric tonnes, which means that the international cotton market is facing an acute shortage of the commodity and this has led to a rise in prices," Subash Grover, chairman and managing director of the Cotton Corporation of India (CCI), told Moneylife. "I think, the next year carryover stocks would be about 9.6 million metric tonnes." CCI is a government undertaking with 300 cotton procurement centres across the country.
Taking a cue from the soaring prices in the international markets, cotton growers are holding their stocks on anticipation of higher prices. After having recovered their production costs-as prices have doubled in just a year-farmers can afford to sit on stocks, while traders also pile up inventories aiming to get higher values. The total arrivals of cotton inched up by 5.4% to 24.4 million bales till the middle of this month.
The Ministry of Agriculture, in a recent estimate, said cotton production in the country in 2010-11 (June to July crop year) would be 33.9 million bales, which is an almost 40% increase from 24.2 million bales in the previous year. The Cotton Advisory Board also has raised its estimates for the crop year to 32.9 million bales from 32.5 million bales.
However, it is estimated that domestic consumption will increase by 10% to 27.5 million bales in the period September 2010-October 2011 from 25 million bales in the previous year.
But reduced supplies in the international markets after floods in China, Pakistan, Bangladesh and Australia has fuelled the price rise in the domestic markets also. Cotton prices have surged nearly 30% in just two months in the domestic markets. Prices in January which were at around Rs42,000 per candy have touched Rs51,000 in February. This compares with Rs27,000-Rs28,000 a candy a year ago.
"International prices are obviously influencing domestic prices, and at the same time the demand from end-producers of yarn and cloth is robust," Mr Grover said.