Since the beginning of the year, gold has enjoyed several means of support, a few of them temporary. Now, most supportive factors have begun to wane, including geopolitics. Physical demand, investor interest and ETP inflows remain muted. Meanwhile, international prices have struggled to stay close to $1,300 an ounce over the last several days. There is now an iota of hope emerging for physical demand. Market participants are pinning their hopes on the new Government in India that is likely to take office in a week’s time.

Import restrictions

Expectations that the new Government would reduce the rate of customs on gold imports from the present level of 10 per cent ad valorem is running high. There is also speculation that the extant strict import rules including export obligation would be eased. If these expectations are realised, there is belief that gold demand in the country would revive.

Over and above this, there is an expectation of a fall in dollar-denominated gold prices in the overseas markets and even a firmer rupee. A combination of all these can potentially result in a sharp downward movement in the domestic price of gold, which currently is a tad below ₹30,000 for 10 gm.

It is in anticipation of such a scenario that many buyers have chosen to postpone their purchase decision. Anecdotal evidence suggests that jewellery demand is muted; an air of expectancy is developing about events that would unfold soon and lead to a price fall.

Market watch

From a fundamental perspective, in the global market, while physical demand has stayed somewhat muted, investor flows have turned negative. Inflows into physically-backed gold ETPs seen in February and March were erased by outflows in April and early this month. To be sure, the outflows are not as hefty as seen this time last year but accretion is not in the positive territory. On the bourses, tactical speculators have built long positions as at May 6 as suggested by CFTC data. But given that prices have failed to rally in the last several days, the risk of less-committed longs exiting is real. The macroeconomic environment too is gold negative. Liquidity-driven price boom is coming to an end. The US Fed has begun to unwind its quantitative easing. Hopefully, in the coming months, when the tapering process is completed, depending on macro data, liquidity will shrink further and the dollar will be in demand.

These signals are ominous for gold. No wonder savvy buyers are waiting for an opportune time to enter the market.

With prediction of below normal rains, the weather can play spoilsport as far as Indian physical demand is concerned. The positive relationship between good harvests and rising rural incomes on the one hand and robust gold demand on the other is well known.

Related Topics
comment COMMENT NOW