Jaitley adds glitter to gold

With the Finance Minister ignoring requests for easing restrictions on gold imports and maintaining status quo on the import duty, the Budget turned out to be a damp squib for gold merchants. Domestic gold prices saw a sharp pullback on Thursday. Spot gold (24 karat) prices in Ahmedabad were up 2.5 per cent to ₹2,868/gram on the day.

In the countdown to the Budget, premium on gold bars had dropped in anticipation of removal of import curbs on gold.

The rupee was very volatile through the week. Though it displayed strength initially, as the Finance Minister set a lower target for CAD in 2015-16 in the Budget, the currency lost sheen as the equity markets melted. The currency ended the week at 59.94 against the dollar after hitting 59.57 on July 10.

In the international market, gold prices firmed up after the news of the distressed condition of the largest Portuguese bank. The yellow metal rose 1 per cent to end the week at $1,339/troy ounce. The intra-week high was $1,345/ounce.

The FOMC meeting minutes that were released on Wednesday was also favourable to gold. The central bank has said that it is not considering rate hikes anytime in the near future. The SPDR Gold Trust, the world’s largest gold-backed ETF, saw an increase of 3.66 tonnes in holdings. In the last fortnight alone, the fund’s holdings have increased by over 15 tonnes (15,000 kg).

Silver ended 1 per cent higher for the week at $21.45/ounce. Platinum closed the week at $1512/ounce, up 0.8 per cent.

Gold has been showing bullish signs in the last two weeks. The rising tensions in Israel and the Federal Reserve’s dovish stance on interest rates have helped.

Earlier, the market expected the Fed to raise interest rates as early as the first quarter of 2015, but now it looks like the central bank will take a longer time to do it. Thus gold has suddenly become more appealing than treasury bonds. Last week’s news of a Portuguese bank’s parent company defaulting on payments of commercial papers has also stoked some haven demand for gold.

Investors, however, need to be cautious. Any positive economic data from the US will see traders sitting on the edge jump out of gold, thus pulling prices down. Technically, the short-term trend for gold will turn positive only above $1,350. This week, the calendar is full with a list of releases in the US. On Tuesday is the retail sales data. On Wednesday is the Industrial Production.

On Thursday, housing starts data and weekly jobless claims number will be released. Consumer sentiment numbers will come on Friday.

On MCX, gold futures climbed 3 per cent to ₹28,356/100 gram last week as spot market premiums on gold went up. Given that the problems in Israel may intensify any time, there is a risk of the country’s oil import bill shooting through the roof.

The Government’s stand on holding restrictions for gold imports thus appears sensible. Further, with the Finance Minister retaining the fiscal deficit target at 4.1 per cent to GDP for 2014-15 it is doubtful if the Government will anytime soon lift restrictions on gold imports.

Gold prices in India may continue to be at a premium over international prices. The quantum of premium, however, will depend on demand.

Since January, spot market premiums have been steadily falling, not because supply has significantly improved but mainly because there is little demand, says a source from a gold importing bank.

But now, with just two months left for the festive season to begin, gold merchants are expecting demand to go up. So, premiums can rise.

Gold futures traders need to take account of this. Some of the price rally can be due to this premium. Also, with the rupee showing signs of weakening, there may be upside in gold contracts. It is risky to hold short positions in gold futures now.

It would have been really good for gold if it had cut $1,350/ounce last week.

But, as prices fell after touching $1,345, the direction is not clear. In the coming week if the metal manages to cut $1,350, the next target will be $1,400.

MCX gold futures cut our second target of ₹28,300 last week and zoomed further to hit a high of ₹28,589. This week, it may head towards ₹28,800 and ₹29,000. Downsides, if any, may see the contract move to ₹28,000 and ₹27700.

MCX Silver contract looks bullish in charts for the short term. It hit a high of ₹46,400, just ₹100 below our target. This week it might rise further to ₹47,200 and ₹48,000.

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