Gold’s over-extended rally, triggered by a host of supportive factors, is now beginning to come off. The excessive speculative froth that had accumulated in the global gold market in a rather short period has started to dissipate thanks mainly to a statement by the US Federal Reserve Chairman that dampened rate-cut expectations. Such is the fragility of the gold market.

Many gold bulls expected the Fed to cut rates by as much as 50 basis points as early as July on the assumption that the Fed may buckle under President Trump’s pressure. But that is not to be.

After sharp correction from the high of $1,440 an ounce, prices are closer to the $1,400/oz mark. The decline was not wholly unexpected though (See June 21 BL Commentary, ‘Punters beware of gold’s sudden rally’).

Gold prices have the potential to fall even further if the scheduled talks between the presidents of the US and China this week during the G-20 summit signal some kind of an understanding to halt the ongoing trade war.

Meanwhile, trade data are hardly supportive. Import data point to a fall in China’s gold arrivals in May because of sluggish demand. According to reports, net imports were down by a whopping 50 per cent on a monthly and annual basis.

While the Chinese economy is widely seen to be losing growth momentum, which has a negative impact on demand, especially jewellery sales, there is also the factor of import restrictions for gold on banks.

The India situation

On the other hand, gold imports to India were strong in May at close to $5 billion, showing a rising trend this year. Clearly, given the fragile foreign exchange situation, the country cannot afford to splurge on an unproductive asset like gold.

However, the import trend is likely to wane in the second half of the year as consumption demand is also seen enervated due to generally slowing growth, employment issues and weak rural incomes.

Taking a cue from global trends, the Indian market too is seen falling in rupee terms from its recent all-time high. If anything, higher local prices — in excess of ₹34,000 per 10 grams — in recent days have not only compressed demand but also encouraged a higher amount of scrap sales adding to supplies.

This would suggest India’s import in June is likely to be less than in May given the price sensitivity of the market. In the next three months rural India would be busy with agricultural operations when demand usually ebbs.

It is interesting that gold’s recent rally has not had a marked impact on silver, which usually tags on to gold’s coattails. The rise in silver has been somewhat muted, trading at around $15.5/oz. Even ETF inflows of about 300 tonnes this month have not imparted much upward momentum to the metal. Platinum, too, has failed to gain from gold’s rally.

Looking ahead, the yellow metal will continue to remain volatile. Simultaneous operation of bullish and bearish factors is seen tearing the market apart. Correction is imminent in any commodity in which huge speculative long positions are built. So, once again, caution. Gold’s rally may fizzle out sooner than punters can imagine.

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

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