No respite seen for yellow metal, price may fall further in 2014

Tags: Commodities
No respite seen for yellow metal, price may fall further in 2014
Bullion, which is normally considered a safe haven investment instrument and has an appeal as jewellery, failed to live up to its potential and is all set to end 2013 with a dismal performance. This is set to halt the unprecedented rally of over a decade, when investors across regions reaped the benefits. At the time of writing this report, spot gold was trading at $1,227, down 27 per cent from previous year’s close of $1,675, while silver is down 36 per cent year to date at $19.5.

Gold’s magnificent rally all this while was supported by rising inflation and extremely loose monetary policies adopted by central banks around the world to counter the recession-like situation in the aftermath of the global financial crisis of 2008.

However, the yellow metal lost its sheen from the beginning of this year, as the global economy started responding positively and fears surfaced about tapering of various stimulus programmes. Also, a not-so-good economic environment in top gold consuming countries like India and China has affected physical demand. This has triggered a heavy profit-booking by fund houses, large as well as small-time investors, which was evident from a series of data such as ETF holdings, imports of major countries and depleting open interest positions across derivative markets.

The World Gold Council (WGC) estimated India’s gold demand till the third quarter of 2013 at 714.7 tonnes. WGC estimates gold demand to remain below 900 tonnes in 2013 against earlier estimates of over 1,000 tonnes. India imported 638 tonnes during the first three quarters of the calendar. China is likely to overtake India in imports this year.

India has imposed import duty of 10 per cent on gold to curb imports, as it has contributed heavily to the nation’s current account deficit (CAD). The government has also taken other measures like restricting quantity of imports, banning import of coins.

Domestic gold prices have been at a premium for most part of 2013 due to short supplies in the domestic market after many import restrictions. The premiums have gone even beyond 10 per cent at times.

Gold demand is declining globally too, as is evident from the drop in holdings of gold ETFs. SPDR ETFs quantity stood at 883.3 tonnes this week, lowest in four years with an outflow of 517 tonnes over the past one year.

With the tapering of the US Fed bond purchases likely in near future, if not in the immediate future, investment flow into the bullion market will recede, fuelling downslide in prices in 2014.

In terms of global demand, with the largest buyer India witnessing a slowdown in demand for containing its CAD, we might see China’s emergence as the biggest gold importer along with Turkey, which has seen a steady rise in appetite for gold.

With the prices already factoring in the above details, a bargain buying at lower level cannot be ruled out as investors, central banks and traders will show interest in buying and holding gold.

Given these factors, we expect gold price to test a new multi-year low before a recovering through the year. In terms of price level, we see gold moving in the broad range of $,890-$1,530 and silver between $15 and $25 through 2014. Meanwhile, domestic gold price movement may be influenced by the movement of the rupee and also availability of the yellow metal in the domestic market. Domestic prices are hovering at Rs 29,000-Rs 30,000 level at present and is expected to come down towards Rs 28 000 level soon. zz

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