Gold will trade in ranges in short-term

After rising for six straight weeks, gold prices fell for the third week in a row as several bearish forces strengthened, the most important being an improving US economy that has led many investors to think the Federal Reserve will raise interest rates sooner rather than later.

Though the disappointing labour report last Friday cast new doubts on the pace of the recovery and led to a rally in the gold market, data released earlier in the week on economic growth and wage increases pointed to a less accommodative central bank and a stronger dollar later this year and early in 2015.

Haven demand continues to be one of the few positive near-term catalysts for the precious metal and, given recent developments in Ukraine and West Asia, this could drive prices higher at any time.

But the lack of buyers in Asia during the summer and the ongoing weakness in broad commodity markets will make it difficult for prices to rise in the month ahead and positive seasonal factors may not help either.

Gold is now up 8.6 per cent so far in 2014, still one-third lower than its record high of over $1,920 an ounce almost three years ago.

Haven demand stemming from geopolitical concerns is the only short-term bullish driver for precious metals at this time.

Much of the gains for gold in June were driven by violence in Ukraine and Iraq and, when combined with more recent developments in Gaza, conditions are clearly getting worse.

However, after months of negative news headlines from half way around the world, this just isn’t having the same impact on US investors and traders as it is being more than offset by positive news on the US economy and what this implies for monetary policy.

Demand from Asia is unlikely to provide much support for gold at current levels in the months ahead.

Wedding season buying in India will emerge soon but it is unclear what, if any, rollbacks to import curbs will be enacted by the Government.

The RBI saw fit to, effectively, eliminate instalment buying of gold at banks and this will reduce overall demand for the world’s number two buyer. Indian and Chinese gold buyers are said to be waiting for prices to fall even more before making bigger purchases and they just might see that in the weeks ahead.

After three years of disappointment, gold and gold stocks remain two of the best performing asset classes this year and this has not escaped the notice of institutional investors and hedge funds who, in recent months, have been buying gold stocks when the stock market falters.

If this carries over into the underlying market for gold and silver, a return to following positive seasonal trends this fall could be in store. The US has still tightened its grip on its monetary policy. Situation is volatile in Russia, Ukraine, and Israel, Gaza strip.

The US and Europe have jointly imposed trade sanctions on Russia.

All these developments would determine the future move of gold.

For the short term, we are expecting gold prices to trade in a range with a negative bias.

We are expecting gold prices to correct up to levels of ₹28,200.

But for long term, the trend for gold remains bullish and for long term investors, buying on dips is suggested for target of ₹29,900.

The writer is a Research Analyst, Geojit Comtrade Limited