After weeks of escalation, a sharp correction in international gold prices last week has unnerved punters in the market. From $1,557 an ounce — the highest level since April 2013 — the market collapsed to end the week at $1,506/oz, raising concerns about the sustainability of high prices.
While the rally earlier was significantly speculation-driven, profit taking following flow of better economic data led to the price fall.
Without doubt, the US economy is cooling, but many experts assert it is not anywhere close to a recession. The Fed Chair said that he does not see a US recession on the horizon. No wonder then, the dollar has continued to hold on to its strength admirably. Although last week’s US Labour Market data were less robust — slowing jobs growth — wage growth is firmly anchored above 3 per cent and labour-force participation is rising, noted a report.
There is still substantial speculative lather left in this market, making it vulnerable to further pressures. That should make the scheduled meetings of both the ECB and US Fed this week and the next interesting. Both are kind of primed to make the monetary policy more accommodative.
Demand hit
The demand side continues to reel under appalling conditions. High prices have led to demand destruction in the world’s largest import market, India. Consumers are either postponing gold jewellery purchases or buying light jewellery. Agrarian distress and lack of rise in rural incomes is contributing to de-growth in demand.
As this writer has said often, under Indian conditions, ₹32,000 per 10 grams appears to be the biting point for gold. Any rise above this level starts to gradually hurt physical demand. Evidence of this is available in the form of India’s import of a mere 15 tonnes in August. High prices have also encouraged scrap sales. The silver lining for the yellow metal is provided by central bank purchases. For instance, the Chinese central bank has been steadily buying gold since the beginning of the year — estimated at around 100 tonnes so far.
The ongoing tariff war between the US and China is also helping gold because of the growth uncertainty it is spawning. So, anticipated easing of monetary conditions, the continuing trade war, global growth concerns and somewhat nervous equity markets combine to provide life to the yellow metal.
Under the circumstances, gold appears unlikely to dip below the psychological $1,500/oz level in the short-term.
However, if and when it happens, the correction will be dramatic. It is critical for investors to have an exit strategy and not get carried away by the hype of a continuing bull run.
Interestingly, renewed efforts have begun to get India’s 12.5 per cent import duty on gold reduced. The rising level of illegal imports is often cited as the reason for demanding a duty reduction. But the demand lacks merit as the country’s surveillance systems are far superior than they were a few years ago. Any estimate of smuggled gold would be mere conjecture.
Meanwhile, silver, too, followed gold’s footsteps in its strident price rise, driven by huge inflows of speculative capital. Silver was at $18.65/oz last Friday, having risen from $18.35/oz a week earlier and from $ 16.45/oz a month ago. CFTC data show rising net long positions in silver.
The writer is a policy commentator and commodities market specialist. Views are personal