Gold may test $1,200/oz in Q2

Last week, supportive factors for gold came into prominence. Yet, it failed to find upward traction. This should worry those bullish on the yellow metal.

Even the heady combination of geopolitical development in the form of Russia-Ukraine conflict and a substantially weaker dollar could not boost gold prices. On Friday, the London PM Fix was at $1,335 an ounce, down 0.7 per cent from the previous day’s $1,345/oz.

Investor interest played a supportive role, though. Tactical investors have increased their exposure in Comex gold with net fund length hitting a new high, the highest since April 2013. Speculative positioning has risen with short-covering and establishment of fresh longs. But investor interest flows from concerns over the Russia-Ukraine conflict; and therefore risks being less-committed or temporary.

Movements in physically-backed gold ETP holdings are seen as stabilising. As of Friday last, total holdings were an estimated 1,860 tonnes, down 18 tonnes since the beginning of the year. Prices will find support on the downside if hefty outflows do not materialise.

However, the forex market prospect is seen as bearish for gold. Friday’s US labour market report was more optimistic for those bullish on the greenback . Currency experts expect the dollar to rule firm, going forward which in turn can put pressure on gold. Additionally, global equities have performed well despite the ongoing geopolitical situation involving Russia.

From a fundamental perspective, Indian demand has been lacklustre with import controls continuing. Local prices have stayed around ₹30,000 for 10 grams. There is considerable pressure on the Finance Ministry to ease the import regulations and cut the customs duty (10 per cent), exacerbated by reports of smuggling. On the other hand, demand in China is stable to strong, going by steady volumes traded on Shanghai Gold Exchange.

The February US employment report released on Friday suggests a return to modest jobs growth. This by itself has eroded the safe-haven premium that gold enjoyed for a few days last week. It is widely believed that the Fed will stay on its taper path. Fed meeting slated for later this month is keenly awaited; but consensus suggests there could be a further $10 billion reduction in its asset purchase programme.

With the macro environment and fundamentals looking neutral and forex market looking bearish for gold, the metal looks vulnerable to correction in the coming days, triggered by anticipated easing of geopolitical tensions.

Gold’s recent rally looks petering out, with investor fatigue set to return. The normalisation of the US monetary policy poses a big risk to gold prices as liquidity will shrink and an important driver — excess liquidity — will be available no more. So, Q2 — April-June — may see a much weaker gold price testing $1,200/oz.

Whether the benefit of fall in gold’s dollar rates will available to Indian consumers will depend on the value of rupee vis-à-vis the dollar.

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