GOLD PRICES TO DIP FURTHER
Jun 16, 2014 | 10:36 AM IST
Jun 16, 2014 | 10:36 AM IST
Invest in gold is not a buzz-word anymore as the yellow metal has corrected in the international market after a 12-year bull-run. Once considered to be a safe haven, it has corrected from an all-time high of Rs 34,500 in last August to Rs 27,000 per 10 grams on the back of improving global economy.
According to bullion traders, in the short term prices are expected to continue on the downwards trajectory and may correct even to sub-Rs 24,000 levels. Going ahead we think gold prices may remain soft on account of the following factors
US economy in recovery mode
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 as the US was staring at 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. The US economy has since then started showing signs of improvement.
The US Federal Reserve has scaled down its bond purchase program. Recently, in testimony in front of the US Congress, Federal Reserve chairJanet Yellen said the US economy is on the mend.
Import restrictions on gold likely to go
Even as the global prices corrected from all-time highs, the prices in the Indian marketsremained 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 Rs 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 & Jewellers Association expects gold prices to fall to Rs 23,000-24,000 per 10 grams by Diwali as it also expects the customs duty reduction in the forthcoming Budget.
Rupee appreciation likely
One of the reasons for gold prices to remain high in India despite weak international prices was a sharp depreciation of the Indian rupee, which fell to a low of Rs 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 measures by previous Finance Minister P Chidambaram and RBI Governor Raghuram Rajan. It bounced back to Rs 62 per dollar. The recent inflows in the Indian market on hopes of a stable government have strengthened the rupee further.
This is having negative impact on gold prices which have corrected sharply recently even as the international prices are stable. As the rupee moved close to Rs 59 per dollar, gold prices declined to sub-Rs 30,000 per 10 grams.
Better returns in equities expected
While gold has failed to give positive returns in the last one year, investors are slowly moving back to equities after a 5-year lull for better returns. In the last 5 months alone, the Indian markets have witnessed a sharp bull-run and hit fresh all-time high in June.
At a time when gold prices are expected to depreciate further, analysts are gung-ho about Indian equities. Investors are liquidating gold positions and allocating more funds to equities.
Low demand for gold in international markets
Investors in global markets are turning away from gold as it has failed to give substantive returns. The yellow-metal is at near 4- month low and the gold ETF holdings are at lowest levels 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.
The latest trade data from Hong Kong indicate a fall in gold shipments from Hong Kong to China in April, with total shipments dropping from 105.9 tonnes to 80.8 tonnes and net shipments decreasing from 85.1 tonnes to 67.0 tonnes from March to April, despite prices being noticeably lower.
Demand in China, as indicated by volume traded on the Shanghai Gold Exchange, has remained steady since, albeit it has remained roughly flat overall. Elsewhere in Asia, gold par premiums have fallen in Hong Kong and Singapore, from $1.10/oz to $1.00/oz and from $1.00/oz to $0.70/oz, respectively, while they have remained flat in Tokyo at zero. Bar premiums have become increasingly muted versus the heights reached last year.
In India, the new trade minister, Nirmala Sitharaman, has discussed goldimports with commerce industry officials (Reuters). While the current gold import curbs remain in place, in recent weeks, the Reserve Bank of India has allowed registered trading houses to import gold under the 80:20 scheme and has allowed certain banks to lend gold to jewelers.
According to recent data from the IMF, Russia increased its gold holdings by nearly 28 tonnes in April (total reserves now stand at 1068 tonnes), Turkey increased its reserves by 13 tonnes (total of 497 tonnes), and Kazakhstan raised its holdings by 2.7 tonnes (total of 151 tonnes). So far, this brings the reported total from IMF data to net purchases of more than 44 tonnes in April.
Gold prices are likely to drop further in the coming weeks, and may even fall to Rs.24,000 from the current level of about Rs.27,000 per 10 grams. Bullion experts feel the fall may be precipitated by a number of factors.
Internationally, signs of a stronger U.S. economy have diminished the golds safe haven status, and money is being diverted to investments such as equities. In the domestic bullion market, gold has reacted about 10 per cent from Rs.30,300 in early May while international gold has reacted from $1,315 to $1,250 per ounce over the same period.
Gold in the domestic markets has traded at a high premium over international markets ever since the Reserve Bank of India (RBI) introduced restrictions on import to combat the high current account deficit (CAD) in July, 2013.
But, with a more stable rupee, the RBI eased some controls, and this led to prices dropping significantly. Gold premiums, peaked at $160 per ounce in end 2013, have come down to $50 levels. The new government might cut the import duty from current 10% in the coming months and a cut of 2-3% in duty could lead to another sharp correction in domestic gold prices.
On the downside, we expect that even a 3% per cent cut in import duty will lead to gold prices falling to around Rs.25,000 levels from the current levels. Additionally, if international prices start to crack as we expect or the rupee appreciates further, domestic prices could fall below Rs.25,000 over the next few months.
Lately brent crude has hit 114 dollar/bbl, as Iraq has threatened to disrupt the supply. Meanwhile U S has also warned Iraq.about failing to put a lid on ongoing Tensions. This has caused a sharp dip in the equity markets with Gold prices again spiking up. However we feel this uptrend, may prove short lived and is unlikely to be sustained over a long period.
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