Are you planning to buy some gold for the upcoming festive and marriage season? If yes, then hold on for a while as market experts believe the prices of the yellow metal can fall further from the present levels.
Gold prices have been under pressure since January end this year. The prices plunged 7.5 per cent to Rs 25,542 per 10 grams on August 12 from Rs 27,640 per 10 grams on the National Commodity and Derivatives Exchange (NCDEX).
According to market experts, selling of gold by China due to the crash in equities there and good economic data from the US has led to strengthening of dollar (appreciation of around 7.5 per cent) in 2015 till date and prospects of rise in the interest rates in the US as early as September 2015 fueled the price fall.
Hitesh Jain, senior commodity analyst, IIFL, said, “The yellow metal is simply dented by the fact that vibes from US Federal Reserve and flow of economic numbers indicate rate hike this year is very much on the cards. Fed in its policy statement has already conveyed that US economy and the labour markets continue to strengthen. The consensus clearly calls for a 25 basis points raise in September.
Firmed up US economy and labour markets can drive US Fed to act on the rates. In addition, overall investment demand for the yellow metal is on the wane. This can be manifested by the fact that the world’s largest Gold ETF ie: SPDR Gold Trust ETF holdings have dropped to the lowest level since September 2008.
SPDR Gold Trust registering continuous outflows for past few months. The fund’s holdings declined by 5 per cent to 672.7 tonnes in July 2015 while holdings on year-to-date basis have declined by 36.32 tonnes or 4.55 per cent indicating weak investment demand for the yellow metal.
Prathamesh Mallya, senior research analyst, non-agri commodities, Angel Commodities Broking, said, “Economic uncertainty still persists across the globe as Greece situation is evident to all, though the fear of Greece exit from the euro zone is not a worry for the time being. All Asian countries except China are stabilising and the US is on a path of growth trajectory as is evident for the stronger dollar.”
Demand and Supply (Global)
Global supply of gold is exceeding demand for the past four quarters in a row. In the quarter ending March 2015, global demand for gold stood at 1,079 tonnes vis a vis the same time last year at 1,090 tonnes. Supplies for the quarter ending March 2015 stood at 1,089 tonnes visavis 1,093 tonnes the same time last year.
Factors to watch
Factors that should be looked before investing in gold are US Monetary policy, Dollar index movement, investment and physical demand, oil prices and inflation and demand from consuming nations like India and China.
Mallya of Angel Broking said, “Investor should look macro economic data to be released from across the globe and US in specific and stock market performance before investing in gold.”
According to commodity analysts, market sentiment towards the yellow metal is now “excessively negative”. Investor positioning also continued to reflect bearish sentiment with outflows from the SPDR gold trust also indicates waning demand for the metal. Speculative positioning in gold also remains bearish with money managers continuously short on the yellow metal for continuous three months in a row exerting downside pressure on gold prices.
The Federal Reserve is set to hike US borrowing costs this year as Chairwoman Janet Yellen in her latest statement was optimistic for further improvement in the labour market and the economy, keeping the central bank on track for an interest rate increase in 2015. This would continue to bother gold prices all through 2015 and in case, a rate hike is done as anticipated would push the prices further lower.
Renisha Chainani, senior manager, commodities, Edelweiss Financial Services, said, “we see potential for the yellow metal to recover only once higher US interest rates are priced into markets. At domestic front, similar 8-10 per cent downside in gold prices could be seen and we could see gold prices bottoming out around Rs 23,000 per 10 gm in India. An investor should wait for next few months for prices to bottom out and should accumulating around Rs 23,000 per 10 gram to 23,500 per 10 gram.”
Hitesh Jain, senior commodity analyst, IIFL, said, “Looking forward, gold prices will weaken further, as market participants will constantly discount the probability of Fed rate hike in September. On price perspective, it is precarious to figure out the bottom in gold prices and we prefer the markets to determine one. It seems markets have made up their mind; the funds don’t like gold anymore. Looking at the scheme of things, there is a high probability of gold prices initially testing the 2010 low of $1,044 per ounce in the international markets and then eventually moving towards $980 per ounce. On domestic side, we do not rule out a downside till Rs 22,000-23,000 per 10 gram.”