Gold reclaims Rs 30K with biggest spurt in 5 years

MUMBAI-INDIA (Aug 17)  After five months, gold managed to reclaim the psychological Rs 30,000/10 gram level on Friday and closed at Rs 30,690 in the Mumbai bullion market, up from Wednesday’s close of Rs 29,520, the highest single-day gain – Rs 1,170 – in the last five years.

The last time the gold price rose comparably was in September 2008 when it spiked Rs 1,265.

The rupee depreciation helped in driving gold prices up. In the last one month, gold has gained 15% or Rs 4,055 as the rupee declined 4% from Rs 59.32 to the dollar (it posted a record closing low of Rs 61.71on Friday).

Also, recent measures to discourage runaway gold imports – they touched as much as 310 tonne in April-June, the highest level in the last ten years – sparked fears of more restrictions and supply constraints in the market, pushing the yellow metal up, said experts.

For instance, Tuesday’s 2% import duty hike – it is the third such increase this year – raised gold prices by Rs 600.

Even in international markets, gold has been on a firm footing, gaining over $50/ounce in the last one week on the back of factors like the spike of 22 basis points in the US 10-year bond yield, a benchmark for interest rates on loans.

So, if the 10-year yield goes up, interest rates on loans also go up as lending to the government is deemed the safest form of lending. Hence, returns on all other kinds of loans need to be greater than the return on lending to the government, given the higher risk.

“An increase in interest rates means Americans will go slow on borrowing and spending. This will slow down the economic recovery process. Given this, any spike in the bond yield leads investors to conclude that the Federal Reserve will continue to print money instead of going slow on it, as it has said in the recent past. And whenever there is a chance that the Fed will print more money, investors buy gold. This is the reason why gold has rallied in dollar terms over the last one week,” said another commodity analyst.

However, some analysts believe it is too early to call gold a safe haven. Naveen Mathur, associate director - commodities and currency, Angel Broking, believes that since the economies of the US, Japan and the euro zone are showing some signs of recovery, and given signs that the Fed might stop its stimulus programme, it is unlikely that gold will keep its safe-haven status for long.

Going forward, experts believe that the depreciating rupee, falling equity market, possible further restrictions on gold and feared withdrawal of the Fed stimulus are the key factors that can affect gold prices in the coming months.

Gold is still 5.6% down from its peak of Rs 32,500/10 gram in November last year. Experts believe that if the rupee continues to tumble, gold can once again breach the Rs 32,000 mark.

Even silver mirrored the yellow metal’s gain, inching up Rs 2,970/kg to close the day at Rs 49,980/kg. In the last one week, silver has gained 18% and gold 9%.