Half way through 2014, markets remain confused where gold prices are headed. Investors are still in dilemma and are now looking at fresh set of factors that will drive the price trajectory for rest of the year.

While there was no real sign of sustained economic strength in 2013 for the world economy, just the idea of Federal Reserve in the US may start tapering at some point was enough to send gold bullion prices lower and the “bull run” in gold ended losing around 30 per cent of its value last year.

Investors lean toward gold and other precious metals as a hedge against both a weak dollar and inflation. A tapering of the Federal Reserve’s monetary policy suggests that the US economy is getting stronger.

This optimistic view comes from the fact that the housing sector and the job market (the two important sectors) in the US are gaining traction.

Although, the creation of ETFs such as SPDR Gold Trust has changed the investment environment, investment flows in the commodity remains largely subdued. Inflows stood at 790.7 tonnes as on June 30 which is largely flat compared with the 798.2 tonnes it logged as on December 31, 2013.

Geo-political unrest

Gold prices are up by 10 per cent in first half of 2014. The prime reason being Russia’s military intervention in Ukraine led to haven buying and investors ditched assets perceived as riskier such as equities.

In addition, lower US 2014 growth forecast by the Fed and its lack of commitment to raise interest rates and continued tensions in West Asia unleashed a wave of short covering. The recent escalation in the geopolitical situation in Ukraine and fresh round of sanctions imposed by the US on Russia have also supported the yellow metal.

However, further price moves would be dependent on a complex set of factors.

A report from the World Gold Council earlier this year said gold imports by China were being used via gold loans and letters of credit to raise low-cost funds for business investment and speculation.

China, the biggest consumer of the yellow metal, is set to see its imports declining as the Government tightens controls on gold financing deals and takes measures to restrict the abuse of gold lending and other financial plays.

Asian dilemma

In India, the premiums charged by banks have declined from a high of $190 an ounce to $7-15 currently because of improved supply since May 21 after RBI renewed import licenses of nearly a score premier trading houses.

On the contrary, there were wide expectations of the bullion industry that the Government might reduce import duty (currently at 10 per cent) on gold in the recent Budget. The Government, however, defied market expectations as it may not be keen on the move as increased gold imports following a duty cut (if any) could widen the current account deficit and impact the rupee, raising inflationary expectations. All other factors remaining constant, if gold prices do start to rally, investors will probably wait a little longer before getting back into gold. However, taking in to consideration, the optimism in the US economy (growth in housing and labour market), strength in the PMI numbers from US and China and the possible tapering of QE by the end of this year and the probability of a rise in interest rates in the US sometime in 2015 are all indications that the rally in gold price will not last long.

Besides, growth in the world economy at large will be a driving factor for investors to put their money in other asset class other than gold.

Spot gold prices can correct to an extent of $1,100/oz (from current price of $1,315) while gold prices on the MCX can correct towards ₹26,500/10 gm in 2014 (CMP: ₹28,000).

The writer is Associate Director – Commodities & Currencies, Angel Broking

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