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Bearish sentiment pervades the global precious metals market, in general, and gold, market in particular. Whether it is the macro-economic environment or investor flows or the currency (dollar), the outlook for the yellow metal is decidedly bearish.
In particular, gold has become vulnerable to a US Fed rate hike in the coming months. This follows stronger-than-expected US non-farm payroll numbers. Robust US macroeconomic data further supports the expectation that a rate hike could happen by June this year.
There have, of course, been other market moving events including the disappointment over the Budget not reducing the 10 per cent customs duty on gold import. The market had anticipated some relief in the duty. Flows into ETPs have turned negative. Last week, over seven tonnes moved out of the physically-backed funds. More outflows are expected. At the same time, in the futures market long positions in gold are falling and short positions are rising. Simply put, investor interest is beginning to wane.
From a currency perspective, the dollar has had a dream run over the last several months. With the ECB coming up with its own version of quantitative easing, the euro has weakened against the dollar. Even as the greenback is now testing 1.1 to a euro, further gains are likely to be slow. China is also reported to be undertaking some monetary easing.
From a market fundamental point of view, the outlook is neutral and not bearish. Despite disappointment over the government not reducing customs duty, gold demand is expected to resurface from next month with the start of the marriage season. Those who had postponed the purchases in anticipation of a rate cut will now begin to return to the market.
Gold import volumes have fallen from levels of 950 tonnes seen in 2011 and they are currently lower than 800 tonnes. In other words, high taxes and prices have not affected the country’s appetite for the yellow metal.
On Friday, London gold Fix was $1,154.81 an ounce. Prices have crashed 2.5 percent since last week
Going forward, the risk to gold prices remains to the downside. The US macroeconomic environment is a major headwind for the metal. However, buying in countries such as India is expected to cushion the price fall.
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