Gold 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. Prices are likely to hover around the $1,200/oz range with a downward bias for the remainder of the year, says CARE.
The near sustained drop in gold prices to multi-year lows has brought to the fore doubts about the safe haven appeal associated with the metal. After an 11 year bull run, prices plummeted in 2013 and the declining trend was carried into 2014, taking the decline in prices in the last 2 years to over 30%. The metal has for long 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 metal is seen to be replaced with the US dollar and other interest bearing investments.
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.
India's Role in Shaping the Gold Markets
Being the second largest consumer of the metal, the changes in the demand scenario here has made a significant dent in the global demand for gold and it price. Faced with a widening current account deficit and exchange rate crisis, attributed to the growing appetite for gold in the country, policy makers imposed severe restrictions on the country's import of gold in mid-2013. Given the country's near total reliance on imports for meeting its demand (India produces less than 1.5 tonnes of gold annually and domestic production is less than 0.5% of its gold imports), a drop in imports here impacted global demand. The subdued demand/imports for the metal, albeit policy enforced, resulted in the country's gold imports dropping to record lows – from 352 tonnes in Q2'13 to 91 tonnes in Q3'13 and 114 tonnes in Q4'13 (as per World Gold Council).
Gold continues to hold cultural and economic significance in the country and this would continue to support demand and prices. Given that the country's CAD position has witnessed a significant improvement, the restrictions imposed on the gold import front could see further easing provided the government is convinced that it can be sustained. Hence, there is no certainty on the timeframe for this.
Gold imports into the country have witnessed a resurgence of sorts in recent quarter with some easing in policy restrictions. In Q2'14, imports increased to 202 tonnes (from 119 tonnes in Q1'14) and the country's gold imports are expected to record as 50% increase from these levels in the remainder quarters of the year. Annual imports would however be around 100-200 tonnes lower than that in 2012 and 2013.
Outlook
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. 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 metal is likely to hover around the $1,200/oz range with a downward bias for the remainder of the year.
Disclaimer: This report is prepared by the Economics Division of Credit Analysis &Research Limited [CARE]. CARE has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE is not responsible for any errors or omissions in analysis / inferences/views or for results obtained from the use of information contained in this report and especially states that CARE (including all divisions) has no financial liability whatsoever to the user of this report.
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