Far from stabilising, gold price has fallen by a fifth from its peak of $2,067 an ounce seen in August. Earlier this week, it moved below the psychological barrier of $1,700/oz to a nine-month low of $1,680 in the international market even as outflows from ETFs gathered pace. It has, however, recovered to $1,735 in early trades this morning.

No investment demand

Improving economic outlook, firming US dollar and rising US bond yields are cited as reasons for the gold price fall. But, the most significant driver is the slump in investment demand. Now that more lucrative investment options have come to the fore (stock market, US dollar), gold has lost some sheen. The speculative lather around the yellow metal has ebbed as less-committed longs exit for better options.

While it is tough to call if gold has already hit the bottom, its downside risk from here (around $1,700 levels) is rather limited. If anything, signs of a modest upside price potential are emerging. Two factors deserve attention. One is the improvement in physical demand. With sharp fall in price, consumers are seen returning to the market in two of the world’s largest markets – India and China.

Anecdotal reports suggest jewellery demand is slowly beginning to pick up as consumers perceive current market rates as not unduly expensive. In India, for instance, at about ₹45,000 per 10 grams, gold is now trading at least ₹10,000 lower than the peak achieved a few months ago. At around 60 tonnes, gold import volumes in January and February showed improvement over the previous months. In China, demand is normalising.

Currency factor

The second factor that is likely to help prop up gold from falling further is the risk of inflation, especially in the US where the rate of inflation is widely expected to rise in the months ahead and move above nominal yields.

In India, the Budget has provided a modest relief to gold by reducing the customs duty by 2.5 percentage points. However, a part of this relief could be neutralised if the expectation that the rupee will weaken in the coming months comes true. The dollar is appreciating and has now reached the highest level against the euro since last November. This will have an impact on emerging market currencies.

All these suggest that the gold market may be ready to bottom out soon and start to recover albeit modestly. As always, the flow of speculative capital will exert an exaggerated impact on market prices and create volatility. Caution is critical for those trading the yellow metal.

The writer is a policy commentator and commodities market specialist. Views are personal

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