Slowing physical demand robs sheen off gold
London (June 1) The tug-of-war between geopolitics and monetary policy that has buffeted the gold market since the beginning of the year may be coming to an end going by the steady decline in international gold prices.
Clearly, the monetary policy in the form of “tapering of quantitative easing” by the US Federal Reserve, which will reduce liquidity and create demand for the dollar, is in focus even as geopolitics has receded into the background.
The yellow metal began the year with a strong bounce to reach as high as $1,392 an ounce by March driven by apprehensions over escalating political tensions in Ukraine.
But the market fell in April towards the $1,300 levels and stayed range-bound for a period of time.
However, the last one week has seen a steady decline in prices as evidenced by the London gold PM Fix. As usual, silver has followed gold.
Investors are clearly losing interest in the haven metal as economic growth prospects improve and equities markets perform well. Outflows from exchange-traded products have slowed; but inflows have not materialised.
Slow demand From a physical demand perspective, things are not looking really bright.
China’s import demand is high, but stalling. Recent trade data from the world’s largest consumer suggest a fall in gold import. As for the other large importer-consumer India, import controls have recently been eased to an extent.
The combination of fall in dollar rates of gold and stronger rupee has helped push domestic prices lower. However, physical demand is yet to pick up.
Expectation of further price fall in international market and anticipation of reduction in customs duty on gold import (from 10 per cent) in the near future means that consumers put their purchase decisions on hold.
As the country moves into the kharif planting season, rural population will be busy the next four months. A matter of concern is the looming threat of El Nino that can potentially hurt crop prospects and rural incomes.
Overall, in the short-term, the outlook for gold is decidedly weak. As macroeconomic data turn positive and liquidity in the US begins to shrink, investors have decided to stay in the sidelines. Physical demand from two of the world’s largest markets is not robust either.
Price forecast
So, for the third quarter, gold prices are set to average $1,250/oz with a 5 per cent movement on either side; but clearly a stronger downside bias rather than an upside risk. As for silver, it should average around $19with risk of a downside to test $18/oz in the coming weeks because of huge physical surplus and tepid investor demand.
The factors to watch out for are the rupee’s exchange rate and change, if any, in the rate of customs duty.
