Debasis Mohapatra
Post News Network
Last week, World Gold Council came up with an interesting report. As per the council, Indian gold demand fell by 25 per cent to 154.5 tonne during April-June quarter of 2015 as against 204.9 tonne during the second quarter of 2014. The reasons attributed are unseasonal rainfall which dragged rural demand coupled with fewer wedding dates. However, what intrigues analysts is the fact that this has come despite drastic drop in gold prices. Usually, any significant drop in gold prices has always followed by surge in buying activity both by stockists and consumers, which has not happened this time. And this may be largely due to the fact that everyone is now sitting on the sidelines waiting for the yellow metal prices to further drop.
According to a report by India Ratings, gold prices may even dip to Rs 20,500 per ten grams, a level last seen about 5 years ago, in case of a rate hike by US Federal Reserve later this year. Gold prices are hovering around Rs 25,000 per 10 gram as of now. Whether this forecast comes true or not will depend on slew of factors, but one thing is for sure, prices of the metal are under severe pressure.
Some Dynamics:
Dynamics of gold pricing are associated with some key indicators. For example, if US equity market does well, money will be pulled out of commodities like gold and enter the stock market for better returns. Gold also loses its safe haven appeal when US economy clocks better GDP numbers and with low unemployment data points. This means, US Federal Reserve will raise interest rates, which will result in better yields from various financial instruments than gold. Further, demand-supply environment has its role in pricing of the metal. China and India are two largest consumers of gold globally. While China is the largest producer and consumer of the metal, India is the second largest consumer of gold. In case of any slowdown in demand from these two nations, gold prices will fall. Further, pricing of gold is also associated with larger league of commodity market. So, meltdown in commodity pricing will adversely impact the pricing environment of the metal.
Trinity Impact:
Now, putting all these relationships to pricing landscape will convince any observer that gold pricing is under bearish mode. US economy is faring better with ample chances of rate hike by US Fed during the last quarter of this year. Similarly, US equity market is giving good returns, which means some money is flowing to stocks from gold.
Similarly, Chinese economy is facing unexpected strain. From double-digit growth numbers, it has come down to close to 7.5 per cent in recent quarters. Its stock market witnessed rout with more than 20 per cent drop in index value in less than two months. This has dragged down metal prices all over, be it precious or ferrous or non-ferrous. The World Gold Council report also indicates slowdown in Chinese demand.
Further, Indian rural economy is on a shaky path. Rural demand constitutes more than 50 per cent of total demand in India. With forecast of a weak monsoon, prices will depend largely on rain God for quick revival.
A classic paradox:
Now, let’s consider the master stroke by China to devalue its currency, yuan and its subsequent impact on gold prices. As per World Gold Council, demand from China will not see much impact due to this move. However, it is to be noted any currency devaluation will push up gold prices and this will drag down demand. So, in a way yuan devaluation works as a key support level for the yellow metal as price rise in China will push up global prices. However, this will come with a caveat, which is demand should remain steady. So, yuan devaluation can be played out in both ways. In one hand, it can push up prices and on the other hand, it can also drag down demand. And gold pricing will largely depend on the outcome these complex dynamics going ahead.
