The gold prices have dropped substantially which has brought to the fore doubts about the safe haven appeal associated with the metal. After an 11 year long bull run, prices have started to correct from 2013 till date. This brings in a question if gold should be purchased this Diwali?
Traditionally, Gold has sustained its prices based on its appeal of a being a relatively risk free and gainful investment. While some of its attributes do remain untarnished, helping it retain its appeal.
The drop in gold prices is being driven by the stronger US dollar, which has been making the metal which is priced in US dollar terms costlier and thereby less lucrative for holder of other currencies.
Although the rise in the US dollar has been the chief contributor to the price decline in gold, a lot of factors have been influencing gold demand and thereby prices. They include:
- The economic weakness in most economies,
- Lackluster buying from top consumer countries like China.
- India’s policy on Gold.
- Lower gold ETF holding by institutional holders have all influenced the movement and direction of gold.
- Global gold demand in H1 2014 has dropped to its lowest level in 3 years. This is largely on accounts of the drop in demand for jewellery and investment demand (bar & coins and ETFs).
A report also says that India’s import of gold has also declined quite sharply from a range of $ 53-56 bn in FY12 and FY13 to $ 27.7 bn in FY14. This was on account of the strong action taken by the government and RBI to rein in the CAD.
India being the second largest consumer of the yellow metal, the changes in the demand scenario here has made a significant dent in the global demand for gold and it price. As per World Gold Council the subdued demand for the metal has resulted in the country’s gold imports dropping to record lows from 352 tonnes in Q213 to 91 tonnes in Q313 and 114 tonnes in Q413. Gold continues to hold cultural and economic significance in India and this would continue to support demand and prices.
The metal is likely to witness a further softening in prices in the near to medium term with the US dollar expected to strengthen further on the back of better performance of the US economy and the expected US interest rate hikes. Increased buying from China and India could provide some cushion for prices as we are in the midst of a festival season. Gold markets could also get some support from higher physical buying at lower prices and from investors who seek portfolio diversification. Nevertheless, the metal is unlikely to see a significant resurgence in demand and price in the near term.
The Yellow metal for now is likely to hover around the $1,200 – 1275/oz range with a downward bias for the remainder of the year. For the next year the view on the Rupee Dollar is around 59 – 62. In India, when the last time when Gold had hit the Rs. 32500 thousand mark in December 2012, the international gold price was at $1900. Today the international price is around $1200. This means the current price should be around the 21400 mark!!! But the current price is Rs. 27000. This is purely because the Rupee which was trading at 46/$ is now trading at around 60 levels. Which means the Indian currency has depreciated by 30%!!!
After looking at the technical charts of the International gold the price target is well below the $1000 mark. This makes it even more interesting. If this was to happen which normally the technical charts never lie, the price of the yellow metal would see a big slide in the years to come.
Hence with all the above factors taken into consideration I strongly feel that Gold should be an avoid and a BIG no no for investments now. At the current juncture your major investment should be ONLY EQUITY where our technical view is extremely bullish for the years to come.
— Kiran Jadhav – CMD.
Precision Investment Services.