Gold is likely to attract more attention in the coming months as global markets brace themselves for a Fed rate hike after a decade. We believe that the Fed is on course to hike rates in December unless US data falters considerably from here on.

On the other hand, central banks globally remain accommodative as the PBoC (People’s Bank of China) cut rates for the sixth time in a year while the ECB (European Central Bank) hinted about expanding its asset purchases from the current €60 billion a month to boost inflation and revive growth.

This situation makes things little more complicated for gold as it throws open diversified economic perspectives and consumers will show very different behaviours depending on the place they are in.

While, investors in the US may see gold as unattractive, in countries such as Malaysia, Indonesia, Brazil, Turkey Russia, and South Africa, which are facing a currency meltdown and with domestic equity markets in a shambles, there could be investor interest.

From the Indian perspective, we have seen increased interest whenever domestic prices hit close to ₹25,000, which was evident in the July and August import numbers. After prices started to fall sharply in July, Indian demand picked up, with imports in July surging to 89.4 tonnes, nearly doubling last year.

But the ongoing festive season doesn’t seem to be doing well on gold purchases and the initial reports show that the demand this season is some 15-20 per cent lower than the previous year. Above that the possibility of a reduction in import duty in the coming future could deter buyers and push their purchases well into next year.

Checking imports Over and above that the government of India has initiated many steps to dent gold imports on a sustainable basis with long-term objectives.

The Sovereign Gold Bond Scheme is expected to garner a decent chunk of incremental investment demand growth as it offers annual interest at 2.75 per cent.

Secondly, the gold deposit scheme is also an interest bearing instrument aimed at creating supply of gold from the vast domestic holdings of gold, which could take off some charm from the imports.

While, it is too early to gauge the success of these schemes in a country of gold lovers, they certainly have potential to channel some of the large quantities of gold lying with temples and trusts. So there’s a lot riding on Indian demand for international gold prices and it doesn’t seem very bright.

Fed rate hike Looking ahead, the Fed rate hike is negative for gold but the gold is already positioned for the current one, and the further direction will be determined by how hawkish the Fed could be and we feel that there will be a long pause between the first rate hike and the second consecutive one, which means gold is unlikely to fall sharply on a sustained basis though a knee-jerk fall cannot be ruled out after the hike.

Inflationary pressures created by falling emerging market currencies and a possible revival in prices of some commodities should bring the lustre back to gold towards the next year-end.

Price-wise, we believe that current circumstances will limit the downside at $1,030-1,000 an ounce even if the Fed hikes in December. In the Indian context, the rupee has weakened progressively over the past couple of months, which is supportive for domestic prices.

This means the short term remains uncertain with possibilities of another round of weakness in early 2016. But over the longer term, with a two-year perspective, gold looks very attractive in rupee terms.

Long-term investors in domestic markets should look at accumulating gold on dips towards the 24,500 level as the base case scenario with provision to average towards 22,500 in the worst case scenario (with import duty coming down to 2 per cent), and upside potential of 28,500 as base case targets and 30,500 as best case for end-2016.

The writer is Associate Director, Head-Commodity & Currency, Motilal Oswal Commodities. Views are personal.

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