It is clear that gold is struggling to stay afloat and trade close to the psychological $1,300 an ounce level in the world market, but has not succeeded. Belief is now gaining ground that the precious metal is perhaps over-valued at the moment and investors may exit, sooner rather than later.

Most indicators and traditional supportive factors — especially geopolitical risks, dollar dynamics and demand — point to an imminent downward correction in the coming weeks. Indeed, the process has already begun.

Despite the US non-farm payrolls number coming below expectation recently, there is a strong indication that the Federal Reserve is on its way to hike interest rate in December, signalling that economic growth indicators are turning increasingly positive, which, in turn, should boost the equity market.

There is also expectation that the Fed will announce rate hikes three or four times in 2018. That should send out a clear signal where the dollar would go in the months ahead and its implication for gold.

In the last one year, gold prices moved higher — gaining well over $150/oz — triggered by a host of supportive factors including an initial dovish expectation of Fed tightening, and, of course, the geopolitical tensions. Indeed, the precious metal withstood two rate hikes by the Fed this year, demonstrating its resilience and haven appeal.

Now that the support factors are decisively weakening, the yellow metal is likely to move down to anywhere between $1,250 and $1,230/oz over the next few weeks and even lower towards $ 1200/oz by the end of this year.

Slack demand

It is the slowdown on the demand side that has actually unnerved the market. Two of the world’s largest markets — India and China — have exhibited weakening demand for gold.

The Indian market faced the after-effects of demonetisation, strict rules of identification for buyers, and introduction of the Goods and Services Tax.

Prior to Diwali, the government removed gold out of the purview of the Prevention of Money Laundering Act and reduced the rigour of customer identification. No explanation or justification was given for the volte-face . So, the recent media reports of large-scale cash sales of gold should ring alarm bells.

It is unclear if it is the result of re-monetisation or the start of another round of unaccounted cash generation. The bullion sector needs close monitoring and regulation to ensure transparency and quality, if we are serious about moving towards a less-cash economy.

Import tax, duties

Meanwhile, desperate efforts are afoot to lobby the government for a reduction in the import duty of 10 per cent on gold.

Whether a reduction in the customs duty on an admittedly de-merit commodity is justified, especially from a revenue perspective, is a question policymakers have to grapple with. There is no guarantee the consumer would stand to benefit.

The UAE’s introduction of a five per cent import tax on jewellery early this year has surely unnerved the Indian jewellery export trade as its price attractiveness pales. The situation could exacerbate when the proposed 5 per cent VAT on gold and diamond jewellery is implemented.

The arbitrage between UAE and Indian prices would narrow further. It would be less-attractive for Indian tourists to purchase gold in Dubai, for instance.

The author is a commodities market specialist. Views are personal

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