How low can gold go?

Rajalakshmi Nirmal | Updated on January 24, 2018


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Previous bear markets suggest prices may be some way away from the bottom

Gold is on a slippery slope. At Friday’s close of $1,099/ounce, the metal was down 43 per cent from 2011 when it topped $1,921.

Investors who jumped in at $1,300 in January are feeling betrayed now. The impressive run-up in the US dollar has taken the sheen off gold. So, is it time to turn bullish on the metal? Not yet, suggests the following data.

History shows that whenever global gold prices have crashed (as in 1974-76, 1980-82, 1982-84, 1987-99 and 2008), the slide has stopped a good 35 per cent or 50 per cent below the previous peak. This time around, had the fall stopped at 30 per cent, gold would have consolidated as it hit $1,300 levels in mid-June 2013.

But the selling continued and prices have since fallen below $1,200. A 50 per cent fall from the previous peak would take gold to $960/ounce.

Taking a technical view of the charts too, one arrives at targets close to what we have indicated above. The $975/ounce level represents the 76.4 per cent retracement level of the upmove from the 2008 low to 2011 high.

The 61.8 per cent retracement level of $1,155 has already been broken two weeks ago. Friday’s close of $1,099, after a low at $1,077, has resulted in a hammer formation on the charts.

On Monday, the metal could open positively. Given that physical market buyers in Asia and the West have started buying gold in the last few days, gold prices may, in the short term, hover around $1,100 levels.

In India, gold prices have moved to a premium of $2-3/ounce, from a discount of $8/ounce in the last week of June. Large bullion dealers say that demand has picked up in the last fortnight. The US Mint on Wednesday said that its sales of gold coins for the month were at 110,000 ounces — the highest since April 2013. In June, it had sold 76,000 ounces and in May 21,500 ounces.

This week, markets will be eyeing the FOMC announcement on Wednesday for immediate cues. The markets expect that the Fed will reiterate its commitment to hike rates and possibly indicate whether it will happen in September or later.

Also crucial this week is the US second quarter GDP release on Thursday. Markets expect a 2.9 per cent increase in GDP for the second quarter, from a 0.2 per cent decline in the first quarter.

Domestic market

Domestic investors need to keep an eye on the rupee. The rupee weakened to 64.04 from 63.47 to a dollar in the previous week.

However, unmindful of this, MCX gold has dropped in tune with international gold prices. The contract closed at ₹24,731, down 3 per cent for the week.

Given that the support at ₹25,000 has been broken, the contract looks weak with a possibility of sliding to ₹24,000 in the coming week.

On the higher end it can rise to ₹25,500 if it breaks the resistance at ₹25,000.

The silver futures contract on MCX too looks weak with prices having slumped below ₹34,000 last week. It could slide further to ₹33,000 if the support at ₹33,300 breaks.

More people say they will buy gold

To a poll run by BusinessLine last week on ‘Will you buy gold now?’ a total of 1,100 people responded. Of that, a high 79 per cent replied ‘yes’. One woman commentator said that she sees this as the right time to buy gold for her daughter, though she may not buy it as an investment. When prices fell in the past, Indian gold buyers usually accumulated gold. Prices of 22 karat standard gold quoted at ₹2,377/gram in Chennai (down about 10 per cent over last year), taking the price of a sovereign of gold to below ₹20,000.

However, as international gold prices aren’t much influenced by domestic demand/supply, a pick-up in domestic demand may not really offer relief to gold investors.

Published on July 26, 2015

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