All the known supports for gold are weakening. While fading geopolitical risks are seen calming the commodity markets, especially crude oil and gold, the dollar has begun to appreciate and the 10-year US treasury yield has jumped to above 3 per cent.

The odds of a hike in US interest rates in June have risen further. The upside risks to crude oil and thereby to inflation have weakened as the threat perception of trade friction is reducing. As a result, the yellow metal has begun to lose its lustre.

Prices falter

No wonder, on Friday (April 27), the metal was trading at $1,321 per troy ounce, down from a week earlier rate of $1,335/oz and a month ago at $1,344. Less-committed gold bulls are gradually exiting the market as the upside is seen capped at the moment.

The price slide is expected to continue in the days ahead, raising the possibility of the metal testing the psychological $1,300 soon, especially given the détente in conflict involving North Korea.

“The trade-weighted dollar index has climbed to a 3½-month high. What is more, gold dropped below the technically important 100-day moving average, sparking technical follow-up selling,” pointed out an analyst.

Slack Asian demand

The demand side too is anything but supportive. The volume of gold imports by key consumers has fallen. The latest trade figures show that imports into the world’s top two consuming countries India and China fell in March. Clearly, price elasticity of demand is at play.

Demand in both importing countries is quite price-sensitive, and in India more so. While high prices discouraged buyers of jewellery, in case of investors the looming risk of a price fall proved negative.

Much is made of the Akshaya Trithiya demand. The auspicious day for gold purchase fell on April 18. But consumer interest was muted.

Calculations based on the Commerce Ministry data suggest that the country’s gold imports declined by 40 per cent year-on-year in value terms in March to $2.5 billion. This equates roughly to 58 tonnes based on average price of $1,326. In the first quarter, India’s gold imports have declined by a third.

The Chinese gold import story is no different. Demand is clearly subdued. Experts estimated that China’s combined imports of gold via Hong Kong and Switzerland fell by 27 per cent in March to 99 tonnes. In line with global developments, domestic prices are likely to fall. However, given the recent weakness of the rupee, the full benefit of overseas price correction is unlikely to be available to Indian consumers. The marriage season is likely to conclude in a few weeks after which — between June and September — demand for gold, especially in rural areas, will stay muted.

One silver lining for the gold market is the forecast of a normal South-West monsoon. If that materialises, one can expect farm output to increase, rural incomes to rise and rural demand to pick up from September onwards.

Gold policy

In the 2018-19 Budget, the Finance Minister announced that the government will formulate a comprehensive gold policy to develop the metal as an asset class. But more important than that is the strict monitoring of gold imports in terms of contract registration, tracking physical arrivals, tracking source of funds and payment towards imports, and disposal of the imported material. Given the humongous finances involved, it is critical the trade becomes more transparent.

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

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