The gold market has not only struggled to decisively break above the psychological $1,800 an ounce mark; it is, in fact, facing an eventful week. Inflation is once again the focus of attention worldwide including the US and Europe, while several central bankers are scheduled to hold their meetings.

For instance, the scheduled November 2 and 3 meetings of the US Federal Reserve has raised expectations among market participants about final announcement relating to tapering. If a decision on tapering is finalised in this week’s meeting, bond purchases will gradually come to an end by mid-2022.

This is most likely to have a negative impact on many commodities whose prices have been driven by too much liquidity chasing various assets. Gold is sure to be a casualty. Prices are most likely to fall by anything between three and eight per cent from the current level of around $1,780/oz.

The weekly Commitment of Traders data from the US market regulator CFTC shows that in terms of market positioning huge positions have been created by speculative investors. As of October 26, the net long position of financial investors expanded by 50 per cent, the highest since early August. The less-committed gold bulls are most likely to exit gold in droves in case of a final announcement on tapering.

There are other constituents of the headwind gold is facing. One is the firming dollar. The other is less-than-satisfactory physical market demand. In its recent report on the third quarter demand trends, the World Gold Council conceded that overall gold demand declined by seven per cent year-on-year to 831 tonnes.

Supply-demand metrics

Weak ETF demand contributed to the decline with net outflows. The recent increase in physical demand in major importing and consuming markets such as China and India can be attributed to pent-up demand. But it was not good enough to support prices higher. Investment demand is also muted.

Simply put, gold supply outweighed demand with consequent impact on market prices in the last quarter.

Under normal circumstances when inflation expectations intensify, yellow metal must find support. Investment in gold is often termed as a hedge against inflation.

However, there are other supervening factors this time including more positive sentiment about economic outlook, a firming dollar, imminent reduction in liquidity, risk of rate hike, elevated interest in cryptocurrencies and not the least, somewhat enervated physical demand. The one area of concern is the Chinese economic slowdown; but even that may prove to be negative for gold.

From the current levels, gold risks a correction first towards $1,750/oz and then closer to $1,700 by the end of the year. Indian consumers may not be able to capture all the benefit of price correction in dollar terms if the rupee were to depreciate with the firming of the dollar. However, there may be intervention in the forex market to ensure no steep decline of the rupee.

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

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