Bullion Cues: Gold dips into a discount

Globally, gold has beaten all other asset classes this year with an impressive 15 per cent return so far. The SPDR Gold Trust, the largest gold-backed exchange-traded fund in the world, has seen its holdings go up 30 tonnes in the last two weeks alone as investors bought into the fund.

In India, however, there has been no rush to buy the yellow metal. Domestic prices have moved into a discount of over $30/ounce to international prices.

Gold demand has waned not just because of the uptick in prices (the price of 22 karat ornamental gold was ₹2,770/gram last week, up ₹400/gram or 15 per cent since December), but also because of the expectation of a cut in import duty on gold in the Budget.

In 2013, the Centre increased import duty on gold sharply (from 4 per cent in January to 10 per cent by August) to curb domestic purchases of gold. Gold imports were seen as a key reason for the country’s ballooning current account deficit. However, now that oil prices have fallen sharply and imports are sliding month-on-month, the gold industry is expecting a reversal of the import duty hike. The 80:20 rule on gold imports was withdrawn in 2014 and the gold industry has been lobbying for the import duty cut since then.

If the import duty is cut in the coming Budget, gold prices will drop by an equal amount and this would make gold cheaper for domestic buyers. Bullion dealers are staying away from the market mainly due to this move.

Tracing trends in the physical market, the traded prices of gold ETFs too have moved to a discount to their NAVs. GoldBeES, the largest gold ETF in India, closed at a price of ₹2,618 on Friday, a discount of 4.8 per cent to its NAV of ₹2,751.7. If the Finance Minister cuts import duty, gold prices will drop and the ETF NAV is also likely to decline.

But if the import duty is left unchanged, ETF prices may revert to their normal levels. In the physical market, dealers will start to stock up again and the price may return to $1-2/ounce premium over international prices as was the case in December.

Traders who believe that the odds of the Centre announcing a gold duty cut are low may well go long on ETFs in the market to pocket gains, as the discount will then close over the next few weeks.

Gold is a good diversifier in the portfolio of any equity investor, as these assets move in opposite directions. This has been reiterated during the recent market fall as well.

Technically, as long as the metal stays above $1,200, the chances for it regaining strength to rise back to $1,250/1,300 remain alive. Supports for the metal are at $1,175 and below that at $1,155. Last week, gold closed at $1,226.8/ounce on Friday, down 0.9 per cent over the previous week with recovery in the US equity markets and the dollar (96.6 vs. 95.94) too edging up.

Several key data releases in the US are slated for this week. The data flow starts with existing home sales on Tuesday, new home sales on Wednesday and durable goods orders on Thursday. The second estimate of the fourth quarter GDP is scheduled for Friday. It is expected that the reading will be at a 0.4 per cent (sequential growth) versus the initial estimate of 0.7 per cent.

The MCX gold futures contract closed in marginally positive territory last week. It ended Friday’s trade at ₹29,515, up 0.4 per cent despite lower international prices, thanks to a weak rupee. The currency closed at 68.46 against the dollar, versus 68.23 in the previous week; it hit a low of 68.67.

Outlook for the gold futures contract is positive with the rupee on a weak wicket. The MCX gold futures contract can try to move up again this week and reach ₹30,000, beyond which the next target will be ₹31,500. Supports are at ₹29,000 and ₹28,000. MCX Silver may see range-bound movements. It may trade within ₹36,500 and ₹37,500 levels. If there is a strong positive momentum, it can try to move up to ₹39,000.

But, the contract has strong resistance at ₹38,800 levels.

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