At around $1,220 an ounce, gold is fighting to hold on to its recent gains and stay above the psychological $1,200 level. But it is facing strong headwinds. Weakening supportive factors suggest the metal’s price is set for correction. There are several factors — both demand side and supply side — that are at play.

Enervated physical market demand in two of the world’s largest consuming markets — India and China — is, of course, known. Import of the precious metal is surely decelerating in both the markets. China’s economic slowdown continues to turn consumers rather cautious. Restrictions on foreign exchange outflows from the Asian major have exacerbated the condition.

On the other hand, in India, demonetisation has helped drive out unaccounted cash, which was a source of gold demand for a long time.

The Budget has surely disappointed gold bulls, who were expecting a cut in import duty. Clearly, gold is a demerit commodity under Indian conditions and does not genuinely deserve any fiscal concession, especially given the revenue implication.

In India, the next leg-up in demand is not likely to occur before September, when the kharif season agricultural crops get ready for harvest and the rural economy will have some cash in hand, although the April-May period may witness some improvement in consumption due to the marriage season.

Over the last four years or so, central banks of various countries were net buyers of the yellow metal. At present, there is hardly any signal that they will return to the market. This side of demand too appears weak.

Importantly, the dollar is expected to stay stronger. The looming possibility of a Fed rate hike (at least twice this year, if not thrice) is expected to lend strength to the greenback. This will put downward pressure on gold prices given the inverse correlation.

The Trump effect

Additionally, the business-supportive policies of President Donald Trump — corporate tax cut, repatriation of overseas profits and infrastructure spending — are likely to boost the economy.

Indeed, in the US, talks of a tax cut are already in the air. If realised, tax cuts would likely bolster growth and boost the equity market. In that event, less-committed longs in gold will exit the metal and funds will move from gold to equities.

Technological improvements are helping to reduce gold production costs. So, mines that were closed are being revived. This can potentially add to supplies.

All these suggest that gold is most unlikely to stay above $1,200/oz level for long. If anything, it will first test $1,175 level first and if that is breached, is likely to hurtle down to $1,150/oz. On current reckoning, this seems to be the most plausible scenario for the yellow metal in the next 2-3 months.

The second half of the year has the potential to be different. Budget deficits in the US, the debt burden and whether the Trump administration is actually able to do what it seeks to do will determine the mood of the market.

Gold prices may enjoy some upside potential then.

The author is a global agri-business and commodities market specialist. Views are personal.

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