Market Strategy

2014 may not be as bad a year for gold

Rajalakshmi Nirmal | Updated on January 04, 2014 Published on January 04, 2014

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Dropping 30 per cent in 2013, gold failed to live up to its reputation as a haven. The fear of EU central banks selling gold from reserves, rally in equity markets and drop in demand for gold from Indian consumers weighed on the yellow metal. But, from a low of $1,187.4/ounce on December 19, after the US Federal Reserve’s announcement of taper, gold has recovered. It closed last week at $1,237/ounce, just above its important support of $1,200/ounce.

But 2014 may not be as bad a year for gold as 2013.

outlook

The yellow metal may remain range-bound initially. But, there is a probability for it to inch up from the later half of the year for the following reasons:

One, the US equity markets may take a breather. If the US economy continues to grow, an improvement in the labour market and increase in interest rate will squeeze corporate profit margins. This would slowdown equities and redirect some funds to gold. Meanwhile, if recovery gains momentum in China, its gold demand will continue to be strong. Reports state that after a record consumption of 1,030 tonnes in 2013, Chinese consumers continued to buy gold last week.

Two, India, the largest importer of gold in the world till recently, may lift restrictions on gold import. The Indian consumers’ appetite for gold can’t be kept under check any longer. Given that the current account deficit has also shrunk to 1.2 per cent of GDP in the September 2013 quarter from 5 per cent a year ago, the regulator may re-look at the import curbs. This could happen towards the approach of parliamentary elections in April-May or post that.

Gold supply is expected to increase at a slower rate in 2014. With current market price of gold just a few dollars more than the cost of mining and producing an ounce of gold, many gold miners have shelved their capex plans.

However, the downside risks to gold price can’t be completely ruled out. If the Fed winds down stimulus at a faster than expected pace and outflows from gold ETFs prolong with physical demand, gold price may drop.

Technically, till price is above the June 2013 low of $1,180.5/ounce, risk is low. But, if it drops below this, it could be catastrophic. Gold can immediately fall to $1,155.7. Retracing from the 1999-lows, we arrive at targets of $1,087.23 and $890.43.

Key resistance for the year is at $1,452. Inability to surpass this level will keep the yellow metal in the range between $1,180 and $1,452, with the risk of decline to lower levels open. Targets on move above $1,452 are $1,527 and $1,628.

On MCX, trading prospects will depend largely on rupee. The rupee may not drop much from the current 62/63 levels at least in the near-term, so, rupee related gains won’t be there. MCX gold (Rs 29,159/10 gram) can move in the range between Rs 26,580 and Rs 30,000 this year. If the contract manages to crawl past Rs 30,000, the next target will be Rs 32,255.

Silver

Silver fell in 2013 for the same reasons as gold, but it fell even more steeply — by 36 per cent. This year, however, silver could fare better than gold. In a fall, it may correct less, and in a rally, it may rise more than gold.

Close to 60 per cent of demand for silver is from industrial users. So, if the global economy picks up, demand for silver would rise. Investment demand for the metal is likely to rise in 2014 supported by improved economic outlook. An important point here to note is, unlike the gold funds (ETFs) which saw a huge drop in holdings, silver ETFs have more or less held their assets in 2013. The largest physically backed silver exchange-traded fund — iShares Silver Trust reported holding of 10,139.7 tonnes of silver on December 17, slightly up from its year beginning holding of 10,084.96 tonnes.

On charts, silver looks a less risky bet than gold for longs. But, silver bulls need to push prices above $25 for a trend reversal.

If price falls below $18, there could be more downside. Long-term support is at $14.8.

MCX silver (Rs 45,475/kg) can trade in the range between Rs 37,718 and Rs 49, 056 with outer limits of Rs 33,893 and Rs 51,420.

rajalakshmi.nirmal@thehindu.co.in

Published on January 04, 2014

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