Headwinds for gold

Gold has firmed up quite a bit over the last few months. The yellow metal has gained nearly 17 per cent during this calendar year, of which 9 per cent has come during the last two months alone. The sharp rise in the price of gold derived from the international turmoil triggered by a hydrogen bomb test carried out by North Korea.

The test set off a chain reaction around the world and fears were being raised that the US might take on Pyongyang and potentially push the world to the brink of a nuclear conflagration.

Historically, gold prices have done well during geopolitical turmoil and crises such as the one following the nuclear test in Korea. International gold prices breached the psychological barrier of $1,300 per ounce and touched a new 11-month high of $1,335 an ounce last week. Most experts say the current rally may not hold long.

They believe most geopolitical risk (a positive for gold rates) has already been priced in at the current levels and from here on there is little likelihood of it going further up.

Since international gold is denominated by dollar, the yellow metal and dollars share an inverse relationship. Whenever dollar weakens, gold prices go up and vice versa. Dollar has slipped against major currencies, including the Indian rupee and experts do not see any let up on this front.

Several other factors have also propped up gold prices such as the Federal Reserve not seeming to increase the interest rates in the short term. The uncertainty around the Trump administration has also worked against the dollar, keeping gold at elevated levels. There are conflicting economic signals by the Trump administration strengthening worries on how long he will be able to last.

The current situation in India may also work against further rally in gold rates. The demand for gold in the country for investment has been subdued. Traditionally, there is an upsurge in jewellery demand during festive and wedding seasons, in the second half of the calendar year.

However, it does not seem to be happening this time round. According to a report of the World Gold Council, the demand for gold in India has slumped 14 per cent in the first half of 2017 — the lowest in eight years. The dip in demand is basically due to the rollout of GST.

The 3 per cent GST load on gold, copious documentation (production of PAN and Aadhaar cards made mandatory) required for purchase above Rs2 lakh and ban on cash deals have combined to play negatively on demand for gold.

Rural demand is also likely to be lukewarm owing to adverse weather and uncertainty around crop production. Another major factor for the high rates of gold in India and the consequent demand slump is the 10 per cent import duty on gold. The government does not seem to be in a mind to cut this duty as it wants to discourage people from dealings in gold.

The present rally may be the result of the fact that traders and jewellers may have stocked on gold ahead of the festive season. However, gold rates are likely to remain range-bound going forward.

There may be a negative bias on its rates in the medium to long term. The rally in Indian equity markets will also play negatively on gold prices as investors still see a lot of upside in India’s equity story.

Now that the global geopolitical situations have calmed down, gold prices may face headwinds ahead of the festive season beginning in the later part of this month.

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