The Hindu Business Line : Gold prices likely to drop below Rs 10,000

Outlook
High volatility in gold will continue for a while before the market bottoms out.
The medium to long term prospect for gold clearly remains bullish.

Suresh P. Iyengar

Mumbai, Nov 14 After a rally for two months, the much awaited downturn in gold prices has taken place. Standard gold in the domestic markets has dropped by Rs 340 per 10 grams in last one week to Rs 10,315, while silver has plunged Rs 1,000 per kg to Rs 19,750 on Wednesday.

London spot gold has fallen over 6 per cent from an intra-day high of $848 an ounce on November 7 to $791 an ounce on Wednesday.

Correction overdue

“The fundamentals remain unchanged. Dollar continues to be weak against the euro and other currencies. Softening of crude is the only consolation. However, gold prices have risen quite sharply and a correction was long overdue,” said Mr K. Venkatraman, head, trading and hedging, Suraj Diamonds. “In India, gold prices may touch Rs 9,700 per 10 gm before it peaks of again.”

“We expect high volatility in gold to continue for a while before the market bottoms out. The medium to long term clearly remains bullish. And, there is 68 per cent probability that market would range between $793 – 823. Only a convenient close above $850 would open a new range of $850-950,” said Mr Si Kannan, Assistant Vice-President, Kotak Commodities.

Dollar’s rise seen

US dollar is expected to gain strength against euro after the investor confidence in Germany, Europe’s largest economy, dropped to the lowest in almost 15 years in November.

The ZEW Centre for European Economic Research in Mannheim, Germany said its index of investor in November fell to -32.5, the lowest since February 1993, from -18.1 in October.

Record rally

In recent times, a weak dollar has affected the price of precious metals. Dollar witnessed a free fall since Federal Reserve cut interest rates in September. The US currency has lost almost 9.5 per cent against the euro this year and has fallen 4 per cent since the September rate cut.

“Gold prices may touch Rs 9,900 per 10 gm in India and $780 an ounce in the London markets,” said Mr Harish Galipalli, head of research, Karvy Commodities.

On November 7, gold prices touched $848 an ounce, its highest after a record $873 on January 21, 1980. Gold ended the week with a gain of $26 an ounce.

Gold prices have jumped 15 per cent during this third quarter and it is the most since 1999. The yellow metal has climbed 27 per cent this year. Since the US Fed rate cut in September, prices have gone up by almost 14 per cent.

Gold climbed 18 per cent in the past two months as lower interest rates sent the dollar tumbling, and crude prices rose to a record. In October, gold prices gained 6 per cent.

Gold has tracked the softening crude prices which fell from $100 a barrel to $91 a barrel in one week.

Crude’s direction

Having corrected from the higher end, crude is more likely to test the lower range in the current correction. “The oil markets are highly volatile of late as it staged a bounce from sub $80 levels to around $99. The implied volatility jumped to a record 44 per cent from about 26 per cent when prices were at sub $80 levels, indicating that high periods of volatility are more likely to continue as the prices retrace from its recent peak,” said Mr Si Kannan. “Crude prices are likely to range between $82.89 and $100.96 a barrel in the coming weeks.”

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