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Faltering gold set for further correction

G. Chandrashekhar, Consulting Editor, Bullion Bulletin, is a commodities market specialist and policy commentator.

 

 

Since the beginning of this year, gold has received positive support from a host of factors including a weak dollar, geopolitical tensions, rising crude oil prices and risk of inflation. The metal’s well known status as a safe haven asset helped.

 

No wonder, prices have stayed well above the psychological $ 1300 an ounce so far and at their peak tested $ 1350/oz as compared with the price of $ 1250/oz mid-December.

Intuitively, the dollar should have gained after the Fed rate hike in March; but the currency did not; and dollar weakness propelled the yellow metal higher.

 

However, more recently, all the known supports for gold have begun to weaken. While fading geopolitical risks are seen calming the commodity markets, especially crude oil, the US dollar has begun to appreciate and the 10-year US treasury yield has jumped to above 3 percent.

 

The odds of a hike in US interest rates in June have risen further. The upside risks to crude oil and thereby to inflation have ebbed as the threat of an escalating trade friction is seen easing. The détente in conflict involving North Korea is another factor. As a result, the yellow metal has begun to lose its luster.

 

No wonder, Friday, April 27 the metal was trading at $ 1321 per troy ounce, down from a week earlier rate of $ 1335/oz and a month ago at $ 1344/oz. On April 30, it traded even lower at $ 1311/oz. Speculators are cutting their net long position in COMEX gold which currently stands at its weakest position in four months. Less-committed gold bulls are gradually exiting the market as the upside is seen capped at the moment.

 

The price slide is expected to continue in the days ahead, raising the possibility of the metal testing the psychological $ 1300/oz soon; and once it is breached the next stop will be $ 1280/oz.  

 

“The trade-weighted dollar index has climbed to a 3½-month high. What is more, gold dropped below the technically important 100-day moving average, sparking technical follow-up selling”, pointed out an analyst.

 

The demand side too is anything but supportive. The volume of gold imports by key consumers has fallen. The latest trade figures show that imports into the world’s top two consuming countries India and China fell in March. Clearly, price elasticity of demand is at play. Demand in both importing countries is quite price-sensitive, and in India more so.

 

While high prices discouraged buyers of jewelry, in case of investors the looming risk of a price fall proved negative. Much is made of the Akshaya Trithiya demand. The auspicious day for gold purchase fell on April 18 this year. But consumer interest was muted.

 

Calculations based on Indian Commerce Ministry data suggest that the country’s gold imports declined by 40 percent year-on-year in value terms in March to $ 2.5 Billion. This equates roughly to 58 tons based on average price of $ 1326/oz. In the first quarter, India’s gold imports have declined by a third.

 

The Chinese gold import story is no different. Demand is clearly subdued. Experts estimated that China’s combined imports of gold via Hong Kong and Switzerland fell by 27 percent in March to 99 tons, although overall in the first quarter imports increased by about 13 percent. 

 

In line with the international market developments, Indian domestic prices are likely to fall. However, given the recent weakness of the Indian rupee, the full benefit of overseas price correction is unlikely to be available to Indian consumers. The marriage season is likely to conclude in a few weeks after which between June and September demand for gold, especially in rural areas will stay muted.

 

One silver lining for the gold market is the forecast of a normal southwest monsoon. If that materializes, one can expect farm output to increase, rural incomes to rise and rural demand to pick up from September onwards.

 

In the Union budget 2018-19, the Finance Minister announced that the government will formulate a comprehensive gold policy to develop the metal as an asset class. But more important than that is the strict monitoring of gold imports in terms of contract registration, tracking physical arrivals, tracking source of funds and payment towards imports, and disposal of the imported material. Given the humungous finances involved, it is critical the trade becomes more transparent.

 

 

Disclaimer: Views are personal and not the views of the publisher.