Derivatives

Gold prices could drop before the Budget

Rajalakshmi Nirmal | Updated on November 22, 2014

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An import duty cut is possible but revision in the 80:20 rule is unlikely



With the new Government set to present the Budget on Thursday, gold investors globally will turn their attention towards New Delhi — the country being the second largest importer of gold. Concessions on gold import duty and lifting of import curbs on gold are widely expected. If the Government gives away some sops, gold prices in the domestic market will drop.

Premiums in the gold market are around $8-10 currently. If import duty reductions happen, gold prices may come down further. Last week, with the rupee getting stronger and international gold prices just marginally higher, gold prices in the domestic market too dropped. Gold spot prices (24 karat) in Ahemedabad dropped 0.8 per cent to ₹2,786/gram.

In the international market, spot gold prices closed at $1,321.08 per ounce, dropping from a high of $1,332/ounce reported on Wednesday.

The strong jobs data from the US gave rise to fears that the Fed Reserve may advance its rate hike. The US added 2,88,000 jobs in June. The unemployment rate fell to a six-year low of 6.1 per cent. The market was expecting an addition of only 2,15,000 jobs.

The data helped the dollar gain strength. The US dollar index rose to 80.269 from 80.039 in the previous week.

Silver prices ended at $21.17/ounce, up slightly for the week. The US SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, posted increase in holdings for the second week in a row.

On Friday, the ETF’s holding was 796.39 tonnes, up from 785.02 tonnes a week back.

Cues to watch

This week, on Wednesday, the minutes of the FOMC meeting will be released. On Thursday the weekly jobless claims report will be out. There are several hurdles for gold that can hold it from inching to $1,350/ounce. One is the crackdown on illegal gold financing deals in China which will temporarily mute China’s gold imports.

The second one is the strength in the dollar. The dollar and gold prices have an inverse relationship. All economic data from the US point to the economy taking off. The Dow Jones closed at a record 17,000 on Friday. With the dollar and US equities becoming more attractive, investors may want to change their bets.

What will, however, act as support for the yellow metal is the tension in Iraq. If anxiety builds up in the coming weeks, there could be some short-term spikes in gold price.

Domestic market investors

On the MCX, gold futures contract ended Friday’s trade at ₹27,557 (per 10 gram), down 0.4 per cent. It retracted from a high of ₹27,940 on Tuesday as the rupee started to strengthen.

Strong foreign fund inflows helped the rupee gain strength over the greenback. Rupee closed at 59.74 versus the dollar, up from 60.09 in the previous week. The intra-week high was 59.53. MCX silver futures ended marginally higher at ₹44,627 (per kg).

On July 10, Finance Minister Arun Jaitley will present the Budget. With a lot of expectations from the new Government, the market may turn very volatile this week. The rupee could move in either direction, so traders who have positions in gold contracts need to be careful.

As already outlined in this column, gold prices may weaken towards Budget day with speculation of a cut in import duty. Import duty cuts to the tune of 2-4 per cent are expected.

If this happens, then there will be an immediate reaction in prices of gold futures contracts. However, the likelihood of softening of the 80:20 rule is not high, given that the deficit scare continues.

Last week, the RBI announced that it plans to swap old gold in its vaults for purer gold abroad. According to a source in a gold importing bank, these are non-good delivery bars lying at the RBI’s vault in Nagpur, which include mostly gold confiscated by the customs and are in various forms, sizes and purity. Now, the central bank wants to convert this into good delivery bars so that it can be used to pledge or sell later when required.

The quantity of gold that will come into supply through this route is unknown. But when it comes it may ease supply pressure to some extent — a negative for gold prices.

On the chart

Gold prices need to rise above the $1,350 mark to see a steady upside. MCX gold futures will remain weak for most part of the week. Traders may profit from short positions. However, trade with strict stop losses.

On the downside, the levels are ₹27,100 and ₹26,560. If these levels are cut, the next target will be ₹25,700. Upside levels are ₹27,900 and ₹28,300.

MCX silver futures has been moving sideways. This week it may broadly follow the trend in gold. Support levels are ₹43,900 and ₹43,300. After this the next level will be ₹42,750. Resistances are ₹45,000 and ₹46,500.

Published on July 06, 2014

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