Gold rush comes to standstill

Gold is likely to trade on lower side in the coming months as there us a likely pickup in growth in US, EU and a stable government at the Centre.

Gold prices have been trading lower below $1300 mark for past few weeks. Prices are under pressure due to the geo-political tensions in Ukraine. Rising equities in the US and optimism about the US economy also triggered heavy bout of selling. Expectations of rate cuts by the European Central Bank stoked investor appetite for equities. 

The dollar is expected to strengthen against other currencies. In India, a stable government at the Centre will lead to growth that could pull down gold prices further this year. According to a report, in the current financial year, gold prices are expected to drop to Rs 25,000-27,000 per 10 gm from the current levels of Rs 30,000. These predictions are based on the expected pattern in international gold prices, assuming a status quo on restriction of gold imports and rupee levels are maintained at 60.

Market participants and analysts feel prices might fall another 5-10 per cent in the next one or two months. “In the spot market, prices have fallen to about ` 26,950/10g, a 10 per cent fall in just a month. We feel gold has further downside potential and could test $1,100/oz. With that in mind and with a view the rupee will stay at 57.5-60.2/dollar, gold prices could decline to ` 25,000 levels. That said, the market is yet to discount the effect of a possible duty cut,” said Sudheesh Nambiath, precious metals analyst, GFMS, Thomson Reuters Commodities Research

 The US Dollar Index — which has a negative correlation with gold prices — remains strong and global gold prices are likely to range between $1,150-1,250 per ounce, after falling from the current levels of $1,300 per ounce. However, as the yellow metal is seen as a hedge against macroeconomic uncertainties, any lower-than-expected GDP growth rates in the US, the EU or China, or any geopolitical uncertainty, could push up global gold prices to $1,300 per ounce levels.

However, the chances of ease in the restrictions on gold imports are bleak according to the report. Easing of restrictions is unlikely to cause a substantial incremental fall in domestic gold prices. This may be a push to global gold prices because of Indian import demand, re-emergence of pressure on current account deficit and weakening rupee.

The gradual winding up of the stimulus programme in the US might push up the interest rates, which could lead to gradual unwinding of exchange-traded fund (ETF) holdings. In fact, ETF holdings declined 28% y-o-y in 2013 and the current inventory holdings resemble the levels last seen in December 2009. The report says continued risk-on-trade on back of an economic recovery in the US and euro zone could only generate limited interest in ETF investments or might lead to a further unwinding of gold inventory.

Analysts predict gold serves as a useful diversification tool in an investor’s portfolio. However, they warn that an investor should not allocate more than 10% of one’s investment portfolio to the metal as a steep and prolonged downturn in its prices could reduce overall returns. Gold ETFs offered by mutual funds are a cost-effective options to buy in electronic form and one gets to buy gold at a price close to the one paid by wholesale buyers.

Gold is known to have a negative correlation with equity markets. In 2008, during the global crisis, the gold prices had peaked as much as 30%, while Sensex fell by over 50%. Now, as the Sensex rallies upwards, gold prices are likely to trend down.

The World Gold Council estimates gold availability through unofficial channels in the range of 150-200 tonne last year. Also, the government’s restrictions on gold import and rupee depreciation last year led to domestic gold prices remaining at near historical highs despite a correction in international prices. While global gold prices declined 17.7% during January to August 2013, domestic gold prices declined to Rs 25,700 per 10 gm in January 2013 before increasing to Rs. 32,100 per 10 gm in August 2013.

Analysts expect an improvement in the discretionary purchasing power of consumers in export destinations like the US and the UK, which will be a positive for Indian exporters. In FY15, the agency expects demand growth from the US and Hong Kong to be better than that in the UAE. Exports of jewellery from India to the US are likely to grow in the current financial year after remaining muted last fiscal. The US consumer confidence index has been improving and higher disposable income in the hands of consumers will support export volumes of gems and jewellery from India.

Gold slid down for a fifth session on June 2, in its longest losing streak since November, as investor sentiment was hurt by stronger global equities and weak physical demand in Asia. Currently, the price movement might be on a pause mode, as previous import relaxations announced by the central bank have not been implemented yet; related clarifications/notifications have not been issued by the customs department. Premia for physical delivery, which fell to $20 a day after the Reserve Bank of India (RBI) announced relaxations, now stand at about $35/oz. Last week, these stood at $50. It is expected once the existing relaxations come into force, more gold will come into the market, which has entered a lean season. Policy changes, expected next month, could further relax import norms. It is widely expected in Budget 2014-15, to be presented in the first half of next month, the import duty on gold will be cut two-three per cent. The cumulative impact of this could be a further dip in prices — 7-10 per cent – in the next one or two months.