Global gold prices likely to drop further in 2014

Govt measures, rupee movements to determine domestic levels

Gold is headed for a near-30 per cent slump in 2013, ending decade-old rally, prompted by rock-bottom interest rates and measures taken by global central banks to prop their economies. A rally in equities and optimism about a global economic recovery dented the yellow metal’s safe-haven appeal. Silver, too, is down 36 per cent for the year, the worst annual performance since at least 1982, data suggest.

This is as compared to an 8.5 per cent rise in the S&P BSE Sensex and 6.4 per cent rise in the CNX Nifty in 2013. At the global level, US stocks have seen a healthy upside, with the S&P 500 Index on course to mark its best year since 1997, reports suggest.

Worries this year that the US Federal Reserve (US Fed) will begin unwinding its stimulus and then the recent decision to do so has also hurt bullion, seen as a hedge against inflation. In the Indian context, the government’s moves to rein in prices by imposing strict import conditions, given the burgeoning current account deficit (CAD) also impacted sentiment.

“Weak physical demand from the top consumer India due to high local prices and contracting investment interest in bullion has weighed down bullion prices in the international market,” said C P Krishnan, whole-time director, Geojit Comtrade.

Outlook
A key factor that would impact precious metals in India will be the rupee’s movement against the dollar. At the same time, for commodities that are not internationally traded, domestic production and consumption would be the price determining factor, analysts say.

“After the elections, however, we believe the Indian currency can recover towards 63 (against the dollar) by the summer, and 61 by year-end,” points out Kunal Kumar Kundu, vice-president and India economist, Societe Generale.

Analysts expect gold prices to drop further next year at the international level but not to the same extent as in 2013. In the Indian context, the government is expected to continue to retain curbs on gold imports, to manage CAD and the overall fiscal situation.

“In the case of domestic gold, another factor that would have a bearing on prices is whether or not the government takes further measures to curb gold imports,” said Shriram Pitre, senior vice-president and head of commodity and currency research, Anand Rathi.

Says Shilpa Kumar, senior general manager and head, markets group and proprietary trading group at ICICI Bank: “The sharp improvement in current account deficit this year from 4.9 per cent of GDP in FY13 to an estimated 2.9 per cent is encouraging. In the short term, it might be necessary to retain the curbs on gold imports till recovery in the exports sector is confirmed.”

Goldman Sachs, BNP Paribas and Societe General expect gold prices to drop below $1,050 an ounce in 2014, reports suggest. Physical demand, which had climbed to peak levels earlier this year as gold prices fell sharply, has cooled – lessening its support for prices.

“Gold prices are likely to hover around $1,200 in 2014 in the absence of any major buying coming from China and India. Technically, the yellow metal has supports at $1,180 and $1,150 levels. A breakout on the upside will only come if the prices breach the $1,262 mark. The overall trend remains bearish for at least the first half of 2014,” Krishnan of Geojit suggests.