Gold prices look set for a further correction in the short-term

Despite a weaker US dollar and the ongoing geopolitical tension created by North Korea, gold prices have begun to wind down from recent highs. Currently, the yellow metal is trading at four-week lows, below the psychological $1,300 an ounce, down almost 2 per cent in a few days.

The trigger for the price decline came after the recent FOMC meeting. The US Federal Reserve will commence the process of balance-sheet tapering or normalisation from October onwards. This was earlier than anticipated and has come as a surprise to the market. Also, there is a strong likelihood of one more rate hike in December and a couple more in 2018. Late Thursday, gold was trading at around $1,291/oz, while silver spot fell below $17 an ounce to $16.95/oz.

Where is the precious metal headed in the days ahead? Clearly, the present weakness is expected to persist and there is still some downside left for gold. The reduction in investor position has been limited so far; and in the days to follow, long positions are expected to be unwound, leaving the precious metal vulnerable to further correction.

To be sure, open interest in gold futures had surged, driven by a 45 per cent increase in long contracts — net long positions surged in the third quarter — mainly due to heightened geopolitical tensions. In contrast, holdings in ETFs decreased.

But, beyond this short short-term price pressure, concerns such as subdued inflation in the US may continue to support gold, according to some analysts. Also, there is now growing belief that tensions with North Korea are a way off from peaceful resolution. So, the haven status of the metal will continue for some more time.

Reflecting international trends, gold prices in the domestic market have fallen well below ₹30,000 per 10 gram. While this is welcome, it may not trigger a demand surge in the ongoing festival season.

The agricultural situation is somewhat fragile with many regions facing acute moisture stress and crop losses. Rural incomes are likely to be under pressure.

The weakening of the rupee is expected to provide some prop to the price slide even as the market is facing enervated demand conditions following strong regulatory measures by the government.

This is possibly evidence — albeit indirect — that substantial amounts of unaccounted money generally flowed into gold in the past, created artificial demand and kept prices buoyant.

Policymakers are concerned over the recent surge in gold imports — especially from countries not known to be producers. It calls for stringent regulatory oversight and stronger implementation of the Rules of Origin.

With the rupee widely expected to weaken further, rising gold imports need close monitoring in terms of tracking its origin, arrival, disposal and revenue. Strong accounting standards and transparency is the way forward.

The author is a commodities market specialist. Views are personal.

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