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Gold prices in correction mode

The main reason for falling prices internationally is that equities are turning favourable and many emerging and developed market indices are at multi-year highs

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bulls seem to be developing doubts about the prospects of the yellow metal. Just a few months ago, everyone was bullish, expecting a one-side upward-run. Now, doubts are being raised on the continuation of the rally, at least in the short to medium term.

Despite a third round of quantitative easing in the US, over the past 10 weeks, prices of the in the international markets have fallen by nearly five per cent, from $1,753 an ounce to $1,667. Mumbai’s spot market prices are down from Rs 32,500 per 10 gm, the all time high achieved on November 26, 2012, to Rs 30,485 per 10 gm. In India, the fall has been steeper due to a strengthening rupee, which brings down the cost of imports and, hence, local prices.

The main reason for falling prices internationally is that equities are turning favourable and many emerging and developed market indices are at multi-year highs. This is thanks to growth re-appearing on the horizon. Even fund managers have started allocating incremental resources to equities.

The head of a large commodity broking house, on condition of anonymity, said, “Several of our clients have taken bearish bets on gold and are targeting levels as low as $1,520, as they feel rising equity markets globally will result in gold taking a backseat in the near term.” In May 2012, had fallen to $1,538 from its all-time high of $1,900 in September 2011.

In the international markets, gold is currently moving in a tight range of $1,665-$1,695 per ounce.

Globally, too, divergent views are coming in. Philip Klapwijk, global head of metals analytics at Thomson Reuters GFMS, had said in his gold survey update that, “In spite of growing market speculation that the decade-long bull run for gold could be over, the consultancy remains positive on the price, forecasting gold to average an all-time high over the first half of 2013 and to recover back well into the $1,800s.”

But, as if there were no takers for his views, gold prices kept correcting.

World Gold Council (WGC), a body formed by gold miners to promote the use of gold, recently said in a report titled ‘Gold investor’ that the gold demand outlook in the near term looks fragile. If demand remains subdued, prices cannot go up.

Under the heading ‘Global growth-brighter but fragile’, the WGC report said, “While economic recovery signals are coming in, there are still lingering economic difficulties which may keep market risk elevated but the role of sentiment should not be underestimated, as it could provide an additional boost to economic activity in 2013.”

The report dwells on the possibility of growth-oriented sentiment, which has the potential to hurt demand for gold. Internationally, too, several factors that were helping gold prices move up are showing diminishing effects.

Nic Brown, head of commodities research at London-based commodity research house Natixis Commodities Markets, said, “Many of the central banks which were buying gold from the market have reached an optimal level of gold holding in their reserves. Gold mine output in 2013, expected to go up two per cent to 2,915 tonnes, and gold coin sales in the US, an indicator of retail demand, has fallen. These could lead to moderate gold prices in 2013, which will average around $1,625 per ounce.” He also believes India’s gold demand may improve in 2013 if the government’s reform measures result in the rupee strengthening despite measures to control gold imports being taken.

India, which contributes to over a third of global demand for gold annually, has started taking measures to discourage gold imports and hence, gold demand. This move has the potential to hurt gold demand in the near term.

There are reports that in the futures market, punters have taken bearish positions targeting Rs 28,500 per 10 gm. They believe gold may revisit its 52-week low level of $1,527. Bullion punters are expecting the rupee to strengthen to 52 and even higher in the coming months, which will result in lower gold prices.

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