The Hindu Business Line : Gold loses glitter; may decline further

Mumbai, Aug 17 Gold prices have seen a precipitous fall in the last few days and indeed in the last four weeks, taking most gold bulls by surprise. Speculators (euphemistically called investors) — on strength of whose support the yellow metal reached seemingly unsustainable heights — have deserted it in search of better prospects elsewhere.

This is yet another evidence of how market prices may appear stretched for some time but cannot defy the fundamentals for too long. The gravity of the situation can be gauged from the price movement. In the cash market, the yellow metal traded on July 17 at $957 an ounce. By August 7, the market had already gradually declined to $873/oz; and on August 14, the spot rate was $807/oz.

Investors and investment funds, who had betted on a rise in gold prices, had to exit the market in a hurry to limit their losses. When the rally is sharp, it is not unusual to see an equally sharp decline too. Why did the sentiment change and why did investors liquidate their long positions? One of the key determinants of gold prices is the US dollar. Weakening US dollar, rising energy prices, inflation concerns, falling interest rates, and uncertainties in the broader financial markets drove investors to the well-known safe haven that gold is.

Inflation fears

As such, the direction of the gold price lay in the hands of investors. Investment funds had moved into gold over much of the past year seeking a hedge against dollar weakness and a store of value as increase in oil prices fuelled inflation fears.

Many of the concerns still remain; but the dollar has been rising against most currencies, particularly the euro, making gold in dollar terms less-attractive. Falling physical demand has also been a cause of concern. High and volatile prices have resulted in demand compression, especially in price sensitive markets led by India, which is the world’s largest importer and consumer of the precious metal. Imports have declined over the last three quarters; and jewellery demand is estimated to have declined by close to half. The physical balance of the gold market shows a modest surplus, rather than a deficit.

Forex market experts expect the dollar to continue to strengthen over the next 3-4 quarters. If this expectation were to materialise, gold will, barring exceptional developments, have to decline further or at best stay at the relatively modest levels as at present.

On the Comex, the futures net long as a percentage of open interest is still high at 40 per cent (all time high 49 per cent), having fallen from 43 per cent following long liquidation. Yet, there is still considerable speculative froth left in the market. The froth can disappear sooner than many think if conditions develop favourably.

Short-term prospects

So, where would gold go from here? In the short term, it is a tough call to take. At around $800/oz, there is sure to be some resurgence of physical demand which could cushion the downtrend. Gold is perhaps closer to the floor now, and prices are likely to remain at the mercy of dollar movements and crude prices.

According to experts, bouts of dollar weakness and constrained mine supply among other favourable external factors (mainly, geopolitics) are likely to support investor interest in the yellow metal. So, the current prices of around $800/oz and further dips may be a good buying opportunity.

Demand Erodes

In the longer term, however, if the widespread expectation of dollar strength materialises, it would be negative for the gold market. As for the Indian market, clearly, demand destruction has set in because of relentless rise in prices. Overall, agricultural incomes have risen but inflation is still untamed. The purchasing power of people is considerably eroded, especially in rural areas. No wonder, household consumption of physical gold has declined.

More Stories on : Gold & Silver | Outlook

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Farm debt waiver: PSBs seek interest

‘What we are doing in India is about the next quarter century’

The inflation debate

Private sector investments in key sectors sharply down

MNCs seeking HR firms’ help to ‘outplace’ employees

Nuclear Power short-lists 4 suppliers for reactors

Day Trading Guide

Gold loses glitter; may decline further

Federal Bank (Rs 215.10): Sell

Dalal Street stays tuned into global cues