‘Gold prices to test $1,600 on haven demand'

Gold hit the $,1500-an-ounce mark for the first time this year in April. In a matter of a couple of weeks, it zoomed to a record $1,577 an ounce in May. Though gold has come off that high, it is still hovering above $1,500 despite falling below the mark briefly.

Analysts and traders are making various speculation on where gold is headed towards. Amidst this, Mr Naveen Mathur, Associate Director, Angel Broking, seems to be cautious. The yellow metal could test $1,600 an ounce by the end of the year, he says in an interview through e-mail to Business Line .

Excerpts:

You had said during an investors meet in Chennai that gold may at the most touch $1,600 an ounce by the end of the year. Do you still maintain that? Where is gold actually headed to? And why?

Yes. We expect spot gold prices to test $1,600/oz levels by the end of this year. The safe haven demand would continue to be the main driver of gold prices as the economic remains fragile, the euro debt concerns persists. In addition, gold is also likely to be increasingly used as a hedge against inflation, with global inflationary pressure getting harder to ignore.

Are there signs of slowdown in India? How far will that affect gold prices?

The country has been witnessing a slowdown in industrial activity with the rise in input and borrowing costs. The macro-economic indicators (decline in GDP growth to 7.8 per cent in the March 2011 quarter, fall in manufacturing PMI (Purchasing Managers Index) slipped to 57.5 in May from 58 in the previous month and the slowdown in industrial growth) do point to a slackening in the pace of growth, indicative of the impact of the monetary tightening being undertaken by the RBI to keep inflation under control.

However, we do not expect this to significantly affect gold demand in India. Apart from its traditional demand, investment demand in physical gold is likely to continue to grow, given the Indian consumers' affinity for the yellow metal. Moreover, with forecast of normal monsoon this year, too, demand for the metal from rural areas would be robust.

What part will inflation play in the yellow metal's price?

Inflation plays a very important role in determining gold prices. The yellow metal is used as a hedge against inflation and rising inflation on the global front has increased the appeal of gold. Input prices have increased sharply in the past few years and continue to do so. Hence, this factor will continue to remain supportive for gold prices this year. Central bankers across the globe have increased interest rates in order to tackle rising inflation as it is above their target level.

How do you see currency movements, particularly dollar, affecting gold prices?

Movement in the US Dollar Index (DX) remains crucial for dollar-denominated commodities as a stronger dollar makes commodities look expensive for holders of other currencies and vice-versa. The value of the dollar has deteriorated and the currency is down almost 7 per cent on a year-to-date basis. Weakness in the DX has helped gold prices clock gains of almost 9 per cent during the same period. Another example of the impact of DX movement on gold is – in the month of May the DX strengthened more than 2 per cent while gold prices declined almost 2 per cent.

We expect the dollar to depreciate further this year as loose monetary policy by the US Federal Reserve has deteriorated the appeal of the currency. The European Central Bank (ECB), on the other hand, has been more aggressive with its monetary tightening measures and this has led to strength in the euro against the dollar. Since we expect the dollar to weaken further we expect this factor to be supportive for gold prices.

Will we see more buying of gold for investments rather than for jewellery in India?

In 2010, gold jewellery demand represented around 75 per cent of total Indian gold demand. Demand for the yellow metal for jewellery increased a whopping 69 per cent year-on-year to a new annual record total of 746 tonnes. Despite availability of new investment products, more than 50 per cent of household savings revolves around physical assets such as real estate, equipment, gold and household durables.

But there is a noticeable shift in demand trends as share of investment demand has risen from 2.5 per cent in the 1980s to 11 per cent during 1990s to around 16 per cent in 2009. In 2009, India emerged as the leading country with a share of about 50 per cent of world investment demand for gold. This rise in investment demand is backed by gold banking and the introduction of futures in 2003-04.

We expect investment demand for gold in India to rise as the purpose of purchasing gold since historic times is mainly to preserve wealth. Since investors are aware of the trend in gold, it will be more attractive to purchase gold as an investment in the physical form. This will give Indian consumers an option to convert into jewellery as and when required and at the same time provides an excellent avenue of investment.

How is silver placed? How is it headed, fundamentally and technically?

Silver prices are expected to take cues from the trend in gold. However, sharp gains in the metal could be capped if global economic uncertainty continues as this could have direct impact on silver's industrial demand.

Technical view

Trend – Sideways Up

Target for 2011 –

Rs 60,000 / $40

What about gold, silver parity?

The gold-silver ratio declined sharply this year and touched a low of 31.53 on April 28, below the level of 34.89 that it touched in 1980. The falling ratio indicates that an ounce of gold could buy only around 31 ounces of silver as opposed to around 70 ounces in early June 2010.

During the year, the gold-silver ratio has been witnessing a decline since the end of January 2011 from an average of 47.80 (January 2011) to 41.72 (June 2011) even touching a low of 35.25 (avg. April 2011). We expect the gold-silver ratio to be in the range of 40 to 50 during the year. (See Table)

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