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Gold rush over?

A likely pickup in growth in US, EU and a stable govt at the Centre could pull down gold prices

As the world’s largest economy gradually winds up its stimulus programme and economic activity in the US gathers momentum, the dollar is expected to strengthen against other currencies. And at home, a stable government at the Centre and a likely pickup in growth could pull down gold prices this year.

According to a report by India Ratings, in the current financial year, gold prices are expected to weaken to about R25,000-27,000 per 10 gm from the current levels of R30,000 per 10 gm. These projections are based on the expected pattern in international gold prices, assuming a status quo on restriction of gold imports and the rupee remaining at 60 or thereabouts against the dollar.

Moreover, the US Dollar Index — which has a negative correlation with gold prices — remains strong and global gold prices are likely to range between $1,150-1,250 per ounce, after falling from the current levels of $1,300 per ounce. However, as the yellow metal is seen as a hedge against macroeconomic uncertainties or any perceived debasement of fiat money, any lower-than-expected GDP growth rates in the US, the EU or China, or any geopolitical uncertainty, could push up global gold prices to $1,300 per ounce levels.

The rating agency does not expect any ease in the restrictions on gold imports. “Easing of restrictions is unlikely to cause a substantial incremental fall in domestic gold prices.

The possible reasons for this may be a push to global gold prices because of

Indian import demand, re-emergence of pressure on current account deficit and weakening rupee,” says the report.

Globally, while the US is gradually winding up its unconventional monetary policy, the EU and Japan continue with their loose monetary policy. Central banks in these countries continue to add to their reserves because of the ensuing uncertainty over fiat currencies.

However, the gradual winding up of the stimulus programme in the US might push up the interest rates, which could lead to gradual unwinding of exchange-traded fund (ETF) holdings. In fact, ETF holdings declined 28% y-o-y in 2013 and the current inventory holdings resemble the levels last seen in December 2009. The report says continued risk-on-trade on back of an economic recovery in the US and euro zone could only generate limited interest in ETF investments or might lead to a further unwinding of gold inventory.

Analysts say gold serves as a useful diversification tool in an investor’s portfolio. However, they warn that an investor should not allocate more than 10% of one’s investment portfolio to the metal as a steep and prolonged downturn in its prices could reduce overall returns. Gold ETFs offered by mutual funds are a cost-effective options to buy in electronic form and one gets to buy gold at a price close to the one paid by wholesale buyers.

To invest in gold ETFs, one must have a demat and trading account with a broker. However, an investor who does not have a demat account can opt for gold funds that invest in ETFs. One can also invest in gold funds through systematic investment plans (SIPs) and, in case of ETFs, one can buy every month.

Analysts say gold has a negative correlation with equity markets as, in 2008, during the global crisis, the price of the yellow metal increased close to 30%, while the Sensex fell by over 50%. Now, as the Sensex is moving up, gold prices are likely to trend down.

After the government increased the import duty on gold and the central bank put restrictions on gold imports, it led to widespread smuggling. The government gradually hiked the import duty on gold to 10% in August 2013 from 2% in January 2012. In addition, gold importing agencies have to set aside 20% of the gold imported for exports.

The World Gold Council estimates gold availability through unofficial channels in the range of 150-200 tonne last year. Also, the government’s restrictions on gold import and rupee depreciation last year led to domestic

gold prices remaining at near historical highs despite a correction in international prices. While global gold prices declined 17.7% during January to August 2013, domestic gold prices declined to R25,700 per 10 gm in January 2013 before increasing to R32,100 per 10 gm in August 2013.

India Ratings expects an improvement in the discretionary purchasing power of consumers in export destinations like the US and the UK, which will be a positive for Indian exporters. In FY15, the agency expects demand growth from the US and Hong Kong to be better than that in the UAE. Exports of jewellery from India to the US are likely to grow in the current financial year after remaining muted last fiscal. The US consumer confidence index has been improving and higher disposable income in the hands of consumers will support export volumes of gems and jewellery from India.

 

Saikat Neogi | The Financial Express

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