Gold unwinds as Korea tensions ease

As expected, gold prices have begun winding down from their recent high of $1,291 an ounce, with the waning of the tensions between the US and North Korea. The precious metal is giving up its safe-haven status and much of the value gained in recent days.

History tells us that often geopolitical risks fade as fast as they rise. Prices tend to rise in an uncertain environment in anticipation of a conflict. When the risk of conflict abates even partially, markets begin to correct rapidly.

Importantly, US-centric events tend to exert a greater impact on gold prices than events elsewhere.

Indeed, headwinds for gold are strengthening. The US jobs and other macroeconomic data are all in positive territory, which, in turn, continues to boost the equities market. If labour market conditions continue to improve — and the expectation is positive — the Federal Reserve is likely to go ahead with one more rate hike this year.

Whether it will happen in September or December will depend on the nature of data flow, and is a matter of conjecture at this point. The Fed’s Balance Sheet normalisation process — it may begin anytime soon — will exert further pressure on gold rates.

The demand side is not looking healthy either. According to reports, in the first half of the year, demand fell by a whopping 14 per cent. Higher prices discouraged consumers while reduced geopolitical risks kept the speculators — euphemistically called investors — on the sidelines.

From various accounts, anecdotal and otherwise, it is becoming increasingly clear that the appetite for gold will be subdued in the second half of the year, too.

The Indian demand scenario does not present a healthy picture. The agriculture situation is somewhat mixed. Rains are deficient. Large areas are still moisture-stressed; and there is risk of a decline in the kharif harvest and a consequent fall in rural incomes if precipitation does not return to normal in the next three weeks.

The tax structure is also cited as a reason for tepid demand. There is now a concerted effort to have the rate of customs duty reduced from the extant level of 10 per cent; but there is little economic or social justification for doing that. Indeed, a strong rupee by itself acts as an indirect reduction in import duty.

As geopolitical risks fade, the yellow metal will hurtle down. The ominous signs are already visible. On current reckoning, it should be no surprise, if by the year-end, gold returns to a more down-to-earth level of around $1,150/oz; in other words, a downward movement of over $100 from the current levels.

Investors have to exercise caution in making their decision on gold investment.

Because silver tags on to the coattails of gold, its prices, too, are set to come under pressure. Despite silver’s semi-industrial and semi-precious metals status, the outlook for silver is not bullish.

On current reckoning, prices are expected to soon correct down from the high of $17/oz. The average price for the third quarter is likely to be $16/oz and $15.5/oz for Q4.

The writer is a commodities market specialist. Views are personal

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