The gold market is at a crossroads. While the fundamentals appear somewhat bullish with demand in India having picked up and Chinese demand round the corner, the macro picture, investor interest and currency movements are far from being supportive.

Data suggest gold imports into the country have surged in October and November, cumulatively estimated at 300 tonnes.

During 2013-14 fiscal, imports aggregated about 640 tonnes and in the current fiscal, if the trend of last two months continues, total arrivals may exceed last year’s. Imports are likely to slow next two months as the marriage season takes a break.

Market participants are wary of some precipitate policy action to curb gold imports, given the latest weakening of the rupee and notwithstanding the fall in crude oil prices

From a global demand perspective, China is the market to watch now.

Ahead of the Chinese Lunar New Year that falls on February 19 festival-related buying has commenced, neutralising any possible slowdown in India’s purchases.

Other drivers However, other drivers of gold prices are far less-supportive.

During August-November, there were net redemptions from physically-backed ETPs. The movement appears to be stabilising currently. Total holdings currently are estimated at about 1,730 tonnes. It must be stated that the risk of large outflows is limited if prices hold at around the current levels. In the futures segment, short-covering resulted in prices rallying in recent days.

As of December 9, net speculative positioning on Comex increased because of fresh longs, according to the latest available CFTC data.

Notwithstanding all this, the macro picture and the US Federal Reserve’s guidance on interest rates will eventually impact the yellow metal. In the US, growth projections are expected to be stronger. The better-than-expected November non-farm payrolls data weigh heavily on the sentiment. At the same time, inflation expectations remain somewhat muted because of the sharp fall in crude oil prices. All this would suggest that the dollar will continue to gain vis-à-vis other currencies, especially the euro which, in turn, will pressure gold prices down.

There is general belief that the US Federal Reserve would continue with its policy normalisation and raise rates sometime in the next 3-6 months, possibly by June.

The prospect of higher rates sometime next year clearly translates to downside risks for gold prices in the coming months.

Together with the currency movement, if the physical market too comes under pressure – for instance, India imposes fresh curbs – the yellow metal will find itself more vulnerable.

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