Gold prices set to decline through 2015: Report

Gold prices dipped below `26,000 per 10 gms on the future market on June 9 to touch a low of `25,811 for the August contract. The yellow metal traded at `25,909 per 10 gms on MCX midday after climbing down from an intraday high of `25,930. In fact, in coming weeks gold is expected to fall further to `24,000.

A recent report by the GFMS team at Thomson Reuters said that gold prices are likely to keep falling through 2015 after a second annual decline this year as US monetary policy normalises and investors switch to higher-yielding assets. Physical demand, which hit record levels last year after prices plummeted in the second quarter, is expected to remain firm but will not be enough to offset a continued decline in Western investment. Bullion experts points out number of factors for the declining gold prices.

 Signs of stronger US Economy

Internationally, signs of a stronger U.S. economy have diminished the gold’s ‘safe haven’ status, and money is being diverted to investments such as equities, said C. P. Krishnan, whole-time director, Geojit Commtrade, a commodity trading outfit to ET. “There is a negative bias for gold, and in India, the booming equity market and stronger rupee point to a lower fancy for gold. However, at `24,000, investors will enter.’’

Global investors rushed in to buy gold as a safe haven after the US economy hit a rock bottom. Prices soared to a high of $1,895 an ounce in September 2011 during debt ceiling crisis. Investors were worried that the US government might default and started selling the US dollar to by gold as a safe haven. However, post the crisis US economy has been improving.

The US Federal Reserve has scaled down its bond purchase program. Recently, in testimony in front of the US Congress, Federal Reserve chair Janet Yellen said the US economy is on the mend. “With the potential for a stronger dollar, the need for an alternative safe-haven could also diminish, which can bring the prices in some consolidation phase in the short to medium term,” said Sugandha Sachdeva, AVP & Incharge- Metals, Energy & Currency Research at Religare Securities to ET.

 Import Restrictions

Even as the global prices corrected from all-time highs, the prices in the Indian markets remained high as the UPA government had imposed import restrictions in order to bring down India’s current account deficit and stem the rupee decline. In July last year the RBI had imposed severe restrictions on gold imports to check the burgeoning current account deficit and depreciating rupee. Under the 20:80 scheme, an importer has to ensure that at least one-fifth, or 20 per cent, of every lot of imported gold is exclusively made available for the purpose of exports and the balance for domestic use.

The recent easing of restriction on gold imports by the Reserve Bank of India saw gold prices correct by `800 in a day. Further correction is not ruled out if the Narendra Modi government decides to remove all import restrictions. Following the Reserve Bank easing the 20:80 gold import norms, the India Bullion and Jewellers Association (IBJA) expects gold prices to fall to `23,000-24,000 per 10 grams by Diwali as it also expects the customs duty reduction in the forthcoming Budget.

In a recent meet of IBJA, Mohit Kamboj, President of the association congratulated the entire gems and jewellery industry as the new government erased a certain amount of gold import norms by allowing selected trading houses, in addition to already permitted banks, to procure the precious metal to boost exports. He said, “Post the announcement the premiums have gone down considerably and spiking rates of gold are also coming down. We expect the premiums to be completely erased in next 15-20 days.”

The recent easing of restriction on gold imports by the Reserve Bank of India saw gold prices correct by `800 in a day. Further correction is not ruled out if the Narendra Modi government decides to remove all import restrictions.

Rupee Appreciation

One of the primary reasons for gold prices to remain high in India despite weak international price was a sharp depreciation of the India rupee, which fell to `68.70 per dollar last August. Gold and oil imports, FIIs outflows and appreciating US dollar had kept the Indian currency under pressure. However, the rupee strengthened following the measures by previous FM P Chidambaram and RBI Governor Raghuram Rajan. It came back to `62 per dollar.

The recent inflows in the market on hopes of a stable government have strengthened the rupee further. It is predicted that RBI is intervening to keep the rupee stable at 59 per dollar mark. This is impacting the gold prices in India negatively which have corrected recently. As the rupee moved close to `59 per dollar, gold prices declined to `30,000 per 10 gms.

Better returns in equities

As gold fails to deliver good returns past one year, investors are eyeing the equities once again after 5 years to mint good returns. In the last 5 months, the Indian markets have witnessed a sharp bull-run and hit all-time high in June. Though gold prices are expected to depreciate further, analysts are bullish on equities. Investors are liquidating gold positions and allocating more funds to equities.

Analysts predict 2014 bringing a new bull cycle into existence. A strong export sector, revival in investment activity, recovery in US and Euro area are significant positive moves for the equity markets.

Gold demand low in international markets

Investors in global markets are wary of investing their money in gold as it has failed to give substantive return in last one year. The yellow metal is at 4-month low and hedge funds have cut net longs by 8.3 per cent previous week. The gold ETF holdings are at lowest since December 2008.

The easing tension between Russia and Ukraine has also calmed investors. A pick-up in the US economy is likely to have a strong negative impact on gold, say analysts. Goldman Sachs has reiterated that gold prices will fall to $1,050 an ounce by the year-end.

GFMS Gold Report

Prices are expected to average $1,225 an ounce this year, down from an average $1,410 in 2013, the first year in which prices had declined in over a decade. They may fall as low as $1,100 in 2014 if gold is hit by further bouts of liquidation, GFMS’s head of research Rhona O’Connell said.

“We’ve had a gold market that was characterised from 2009 to 2012 by heavy investment due to financial uncertainty,” she said. “That’s now turned around, and we’re in a period where professional investors have better places to put their money as far as rates of return are concerned, and they’re not as concerned about risk.”

Gold prices plummeted 28 per cent last year as investors sold out of investment products such as physically backed exchange-traded funds on expectations that the Federal Reserve would roll back its extraordinary stimulus measures. Those measures had been a key factor driving gold higher in the wake of the financial crisis, weighing on interest rates – and hence the opportunity cost of holding the metal – while stoking fears of inflation.

Bar investment jumped by a third to an all-time high of 1,377 tonnes last year, while jewellery buying rose 18 percent to a six-year peak of 2,361 tonnes. In 2013, demand was particularly strong in China, which overtook India to become the top consumer of the metal last year. Its gold jewellery fabrication demand surged 40 per cent to a record 871.9 tonnes. Supply of scrap gold fell 22 per cent last year, meanwhile, as lower prices made selling gold less attractive to consumers. Buying of gold by central banks fell 25 per cent last year to 409 tonnes.

Factoring in liquidation from ETFs and a rise in mine production to a record 3,022 tonnes, the gold market recorded a net surplus of 277 tonnes, GFMS said. Small deficits are likely to be seen in the physical market in 2014 and 2015, O’Connell said, but a continued drift lower in ETF holdings, reflecting a lack of interest from professional investors, will put the market more or less in balance.  “There will be an undertow of physical demand, but without professional investment, you generally don’t find physical demand is enough on its own to drive prices higher over a sustained period of time,” she said.

“What we think is going to happen is that the price will continue to decline broadly during 2015. It won’t be until you get to 2016 that you will find incredibly strong physical demand, if East Asia keeps growing the way it is, results in the kind of deficit that will make a difference to price.”

Expect price to decline rapidly

Gold surged higher on June 16, finding resistance at the 50 DMA at $1285 before reversing sharply. This reversal pattern was further followed on June 17 when price went as low as $1263.

Goldtradingexperts.com expects the price to decline rapidly now with a break of $1240 the first target for the bears, who will fancy their chances of testing $1180 this time. On domestic front, gold prices are likely to decline below Rs 25,000 per 10 grams in the near term due to easing of import norms amid expectations of reduction in customs duty in the forthcoming budget.

Shiva hrivastava, MD & CEO, IGuru Research opined gold prices may face an upward push and see a range of `25,750- `26,500 per ten grams in the coming week. He further said RBI’s easing of 20:80 gold import norms is positive for the gems and jewellery industry.

Analysts expect a reduction of the customs duty to 4-5 percent from the current 10 percent in the forthcoming Budget, resulting in declining of gold prices. The decline in the gold prices was at futures trade was also in line with a weakening trend overseas, analysts added.

Gold premiums in India almost halved on hopes the new government would ease restrictions on imports of the precious metal, while demand in rest of Asia failed to pick up despite a drop in prices. Indian premiums fell to USD 30-USD 40 an ounce over the global benchmark, from USD 80-USD 90 last week.

At international level, gold prices fell 28 percent last year, the first annual decline in 13 years, releasing pent-up demand across the world.