Despite several risks looming, including geopolitical, growth and ‘event’ risks, gold has not been able to decisively break out of the narrow $1,300-1,330 an ounce range it has got trapped in in recent days. The flow of Brexit related news failed to enthuse the market, as also statements by the US Federal Reserve Chair.

There is still uncertainty about the future course of action by the Fed. In all likelihood there could be a rate hike in March and a higher probability of a pause after that for the rest of the year.

Headwinds

What happens to the dollar after the likely pause is key to unravelling gold’s future market direction. There is a belief, the dollar would stabilise for a while and then start to weaken in the second half of the year.

But importantly, from the fundamental perspective, there are headwinds the yellow metal is likely to face this year. Gold demand is set to fall. Evidence of this is already available if one went by India’s imports in January. The value of imports surged by over 30 per cent, possibly due to higher gold prices.

However, month-on-month gold imports were down about 10 per cent because of demand conditions. According to a report, based on an average price of $1,292 per ounce, India’s imports equate to about 55 tonnes, which is 16 per cent below the twelve-month average.

Another report pointed out that Swiss exports more than halved to a mere six tonnes in January, making it the lowest monthly figure since at least 2014. There is a massive expansion of domestic refining capacity in recent years, which has led to a sharp rise in import of gold doré (semi pure) into India at the expense of refined gold, the report pointed out.

As is widely recognised, India has always been a price sensitive market and at higher prices — like at present — one can see a certain demand compression. It can be said that ₹30,000 per 10 grams is a ‘biting point’ in India, beyond which demand growth begins to evaporate.

There are other uncertainties as well. India is set for general elections between April and May. It is during this period, it is generally believed, that enormous amounts of cash change hands. A new government, whose shape is unclear at the moment, will be in place by end-May or early-June.

The Rupee, too, has continued to remain enervated, staying above the psychological 70 to a dollar. A weak rupee makes imports so much more expensive. Additionally, the rural sector — the engine of bullion demand growth — has not performed well.

If one were to crystal gaze, demand for the yellow metal will remain subdued as prices continue to rule at record levels. In the event, there is a strong possibility of retailers de-stocking.

In China, too, gold demand is expected to be subdued and imports are likely to decline in the months ahead as higher prices deter buying. However, January imports surged possibly due to new import quotas for banks and retailers stocking ahead of Lunar New Year holidays. Slowing Chinese growth and weakening currency will influence market conditions.

Importantly, the trade talks between the US and China are being closely tracked. How the dispute pans out will impact the currencies of the two countries which in turn will have an effect on gold.

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

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