G Chandrashekhar

Supportive factors for gold weakening

G. Chandrashekhar Mumbai | Updated on November 23, 2017 Published on January 28, 2014

Safe haven The recent price rally has prompted gold bulls to clutch even at the straws to argue a case in the metals’ favour.

Gold prices in the last several days have not only held up well but also risen to nine-week highs.

The metal rose to Friday PM Fix of $1,267 an ounce in London. Interestingly, just as many investors were writing off the yellow metal, it seems to have regained, albeit partially, its haven status, triggered by currency market volatility and faint but gathering hope that physical demand in the world’s largest import market India may improve.

The recent price rally has prompted incurable gold bulls to clutch even at the straws to argue a case in the metals’ favour. Yet, portends are ominous.

Despite the price rally, market drivers are certainly not as strong as they used to be. Take physical demand for instance. The Chinese Lunar New Year usually generates strong demand and it has done so this year too. However, such demand tapers off soon thereafter.

Physical demand

At the same time, Indian physical demand even now stays enervated and was weak even during the seasonally strong period.

Much is being made of political statements for relaxing gold imports. Clearly, the country is in no position to relax the extant controls on gold imports. With the rupee showing renewed signs of weakness, the possibility of any relief in loosening the tight controls appears remote. So, looking ahead, the market fundamentals are not really supportive.

The uncertain global macroeconomic backdrop and high levels of liquidity that had driven gold prices unusually higher in recent years are settling down well.

The macro data, especially from the US, are improving. As a corollary, the US Federal Reserve which has asserted that tapering will be data-driven, may continue with its tapering programme, shrinking liquidity.

One more round of a $10-billion reduction in asset purchase is widely seen as possible. Chinese economy is also seen slowing and gold imports may not see any marked growth in 2014.

Outflows from physically-backed ETPs (exchange-traded products) may have slowed; but investor interest is surely not returning to this market in full vigour.

ETP holdings are currently at three-year lows, a little shy of 1,900 tonnes. From all these, it is clear gold’s recent gains are likely to be short-lived.

Renewed pressure

The metal is likely to come under renewed pressure and prices may soon test $1,200 an ounce levels and possibly lower.

Whether the Indian consumer will benefit from a correction in price is hard to tell because of the uncertainty relating to the rupee.

Forex experts believe the rupee is heading towards 64-65 to a dollar in a two month timeframe. Any benefit of falling gold prices overseas in dollar terms may neutralised by a weaker rupee.

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Published on January 28, 2014
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